How to Enhance Fraud Detection in Digital Payments – A Guide for Banks

The shift towards real-time or instant payments is becoming increasingly common worldwide. However, with new payment systems, such as digital payments, the risk of fraud has also grown significantly in recent years.

While the new solutions allow quicker payments and transactions, they leave little time for banks and financial institutions to detect and mitigate payment fraud.

In this blog post, we will discuss the challenges to monitoring fraud and suspicious transactions in digital payments and strategies for banks and financial institutions to combat fraud in digital payments.

4 Key Challenges in Digital Payments

When it comes to monitoring and detecting fraud in digital payments, banks and financial institutions encounter the following challenges:

1. Diverse Payment Methods

The rapid evolution of digital payment methods like credit/debit cards, cryptocurrencies, and digital wallets has expanded the attack surface for fraudsters. Each payment method has unique vulnerabilities that require specific countermeasures.

2. Rapid Transaction Speed

Real-time or instant payments are convenient, but they are also vulnerable. Fraudsters and criminals can exploit these vulnerabilities to quickly move funds and make detection and intervention more challenging. Traditional transaction monitoring controls and processes are insufficient to detect fraud, including digital payments.

3. Sophistication of Fraud Techniques

With the advancement in technology, the tactics of fraudsters have also evolved. They now employ complex and advanced techniques to exploit the weaknesses in controls, processes, and systems for identity theft, account takeover, and advanced phishing scams.

4. Global Scale and Regulatory Variance

Digital payments often cross international borders, which adds a layer of complexity. Global diversity also opens up opportunities for fraudsters to exploit weaker regulatory environments and take advantage of different international regulations and enforcement capabilities of various jurisdictions to perpetrate cross-border frauds.

4 Key Strategies for Fraud Detection in Digital Payments

Banks and financial institutions can consider the following key strategies to detect and minimize fraud in digital payments and safeguard themselves and their customers from financial losses.

1. Implement AI and ML-based solutions

AI-driven solutions are increasingly being adopted by banks and financial institutions across the globe for fraud detection. Tools based on emerging technologies, such as artificial intelligence and machine learning, can help process vast amounts of data to identify patterns and anomalies indicative of fraudulent activity.

According to a survey by Plaid, 76% of FinTech users prefer to verify their identity when signing up for new services. This trend underscores the importance of robust identity verification and authentication technologies in the digital payment space.

2. Advanced Real-time Data Analytics and Monitoring

Real-time data analysis can help banks and financial institutions be more proactive in detecting fraudulent activities. With advanced real-time data analysis and monitoring, banks can boost their fraud detection capabilities.

A case study by McKinsey showed that a regional bank in the United States managed to reduce annual losses due to a specific fraud typology by over 32% by using advanced analytics combined with risk-driven policy changes​.

3. Identity Verification Technologies

With the rise of instant payments, robust identity verification has become critical. Banks and financial institutions must adopt smart approaches to verify customer identity to streamline their fraud prevention approach. For example, they can implement techniques such as liveness checks, ID validation, geolocation, and biometric verification to support their efforts and keep fraudsters at bay.

According to a survey by Plaid, a significant majority (76%) of FinTech users prefer to verify their identity when signing up for new services. This trend underscores the importance of robust identity verification and authentication technologies in the digital payment space​.

4. Collaboration and Information Sharing

The growing collaboration between bad actors is leading to sophisticated fraud and increased attacks. Banks and financial institutions, such as payment service providers (PSPs), must also establish a secure platform to share information and collaborate for identifying and reporting suspicious activities to local law enforcement and regulatory authorities. This collaborative approach can help them exchange information and safeguard against evolving fraud techniques.

Conclusion

To combat fraud in digital payments, banks and financial institutions must continue to evolve their process and internal controls. They also need to leverage and combine emerging technologies, such as AI and machine learning, real-time data analysis, advanced analytics, etc., for fraud detection and prevention in digital payments to protect consumers and businesses from the growing threats of financial fraud.

An enterprise-grade solution, such as ALFA offers a viable solution for effectively monitoring and preventing fraud and helping financial institutions fulfill their AML obligations.