Banking Executives Report Lacking Proactive Fraud Prevention Approach

Transaction Data and Customer-Abuse Scoring Seen as Insufficient to Accomplish Goals

WASHINGTON, Dec. 7, 2022 /PRNewswire/ -- While a comprehensive fraud management program is essential to mitigating risk and driving growth, a new survey finds that executives at some US financial institutions are at odds on whether their strategies are sufficiently proactive.

Specifically, the survey of 105 decision makers in fraud strategy at banks, wealth managers, and financial technology firms conducted in June by global professional services firm Guidehouse and American Banker. This effort was part of a series of research surveys designed to assess fraud monitoring and prevention approaches, customer education, and alerts. Of most concern, 73% of respondents considered their company's approach proactive—despite evidence to the contrary.

Fifty-five percent of executives at those companies describe their organization's approach as proactive, far fewer than their employees in IT (74%) or compliance (87%), revealing a perception gap.

"Financial institutions may underappreciate the need for constant evolution of their fraud program, leaving them open to unknown fraud risk. Banks must be dynamic in their fraud risk approach to stay ahead of persistent bad actors – using proactive and predictive risk indicators combined with the right tools is the key to success," said Ellen Zimiles, Financial Services Partner and Segment Leader.

The data also suggests that institutions may be using improper or misleading metrics to gauge their success in fraud prevention. When asked which outcomes they relied on to measure their defenses, the largest share, 61%, cited reduced customer fraud complaints, while a similar number, 59%, cited fewer instances of fraud detected internally. Fifty-two percent cited lower fraud-related expenses and the same share cited lower customer attrition related to fraud.

Such indicators can be deceptive, because a large share of fraud incidents are not reported by customers. Moreover, low detection internally or lower expenses are also not reliable as indicators, since companies often fail to use the proper internal tools.

"Effective fraud risk management strikes a balance between the necessary level of friction needed to weed out bad actors, while ensuring you provide white-glove treatment to your actual customers," says Salvatore LaScala, Financial Services partner and leader of the Global Investigations and Compliance Practice. "By proactively collecting and analyzing data throughout the customer life cycle, companies can build a foundation for better real-time decision-making. To build a more comprehensive fraud prevention strategy, organizations should continuously cycle through testing, monitoring, implementing, and orchestrating their solutions and consistently ensuring data quality."

Guidehouse found that companies with a proactive approach are much more likely to employ a dedicated fraud strategy team (78%) and conduct ongoing technology assessments (55%) than organizations with a more reactive approach (14% and 32%, respectively). These methods are more likely to yield actionable and ongoing performance metrics that identify and accurately quantify the number and type of fraud attacks taking place, as well as the speed and effectiveness of the organization's response to them.

The survey found that the largest share of respondents, 70%, said their company uses transaction data to monitor customer-driven fraud risk, followed by device management, background checks and identity proofing (55% each), and rules management (50%). The least common method was fuzzy record analyzers (10%).

Only 20% of respondents said their organization uses customer-abuse scoring. However, 71% said the customer-abuse scoring process is "very effective in identifying fraud," while 24% said it was not very effective.

This research was conducted online during June 2022. To qualify, the 105 respondents had to work at a bank, in wealth management, for a money transfer, or for a money fintech organization. Qualified respondents also had to be at least a key contributor to fraud strategy.

Guidehouse is a leading global provider of consulting services to the public sector and commercial markets, with broad capabilities in management, technology, and risk consulting. By combining our public and private sector expertise, we help clients address their most complex challenges and navigate significant regulatory pressures focusing on transformational change, business resiliency, and technology-driven innovation. Across a range of advisory, consulting, outsourcing, and digital services, we create scalable, innovative solutions that help our clients outwit complexity and position them for future growth and success. The company has over 16,500 professionals in over 55 locations globally. Guidehouse is a Veritas Capital portfolio company, led by seasoned professionals with proven and diverse expertise in traditional and emerging technologies, markets, and agenda-setting issues driving national and global economies. For more information, please visit www.guidehouse.com.

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SOURCE Guidehouse