Assessing the Fraud Challenges of Accounts Opened Digitally
- Digital Banking provides many benefits
- Unfortunately, Digital Banking also introduces challenges
- There are three key areas to address when addressing this potential fraud avenue
Jack Henry FinTalk features a post emphasizing that, while the shift towards digital banking has brought significant benefits, there have also been new challenges introduced when it comes to fraud prevention. Indeed, as more customers open accounts online, financial institutions must adapt their fraud detection strategies to keep pace.
Previously, NICE Actimize noted that new accounts were seeing 17X higher fraud rates. Well, banks are feeling the effects; according to the post, 65% of banks are more concerned about new account fraud in the digital channel compared to just one year ago. This is a valid concern, as the potential for more applicants is weighed against increased operational costs to manually review applications and the risk of new fraud tactics.
Addressing New Account Fraud
The post outlines three key areas that financial institutions must address:
1. Customer Identification Program (CIP): Verifying that the applicant is who they claim to be by checking personal information like name, date of birth, address, and ID number.
The backbone of identity verification aims to answer the question: "Is this person who they say they are?"
This has been complicated with the emergence of deepfakes, as AI is able to generate realistic images of individuals. Furthermore, fraudsters are able to obtain legitimate personal info that can be utilized for fake identification.
2. Know Your Customer (KYC): Assessing whether the applicant's behavior is normal and aligns with their profile.
KYC both enriches the identification of a user at the opening of an account and focuses on the ongoing identity relationship between the institution and accountholder.
This issue stems from the fact that financial institutions are often never able to meet the person face-to-face, making it incredibly difficult to assess a customer's legitimacy. One recommended method is a questionnaire, specifically to understand the usage of the account and expected velocity and amounts of transactions. If these do not align with similar accounts, higher thresholds should be placed until patterns emerge.
3. Fraud Threats: Detecting whether the applicant is trying to deceive the institution via tactics like first-party fraud, third-party fraud, synthetic ID fraud, or account takeover fraud.
Also emphasized: Manually reviewing every application is no longer a sustainable approach. Automating the identity verification process will enhance the customer experience and drive significant cost savings.
The article discussing how banks are struggling with identity verification of new account holders, citing that not only is it resource intensive, but also discouraging to new customers when the process is difficult -- 40% of abandoned applications result from clunky authentication questions.
Enhancing New Account Fraud: Verification vs. Detection
This begs to the question: More resources needed vs. more fraud detection downstream.
For instance, if a new account is opened and the first deposit is a check from a payer out-of-state, or the deposit is made in a state that is not close to where the account holders resides, the item should be flagged for review and verification. These types of validations are key to deposit fraud detection and readily available for FIs.
Inevitably, FIs will need to weigh the benefits of new accounts vs the potential risks of fraud. However, by deploying the right technologies, banks can mitigate their risks and reduce losses.
When a new account is opened digitally, it is monitored more closely by technology to raise flags on potentially fraudulent activities through profiles. By developing profiles that have higher threshold, transactions like checks are scrutinized more thoroughly. Using this methodology, many financial institutions reap the benefits of downstream fraud detection while enhancing threshold early with new accounts.