How To Reduce Exposure To Merchant Initiated Fraud?

June 30, 2021

For a bank to find itself on the receiving end of merchant fraud is nothing new.  Likewise, the need for effective merchant fraud detection is something that has been acknowledged for several decades.

The biggest difference in today’s business landscape is the way in which growing digitisation has radically expanded the scope for fraudulent activity to take place. As a result, traditional fraud detection and fraud monitoring practices have been rendered obsolete, or imperfect at best.

For banks and lending institutions, keeping up with increasingly sophisticated fraudsters has proved a largely insurmountable challenge. Particularly for those that continue to utilise in-house fraud transaction detection and payment fraud prevention systems, the cat and mouse game is one they are not winning. 

However, the same advances in technology that are posing a challenge to the sector also bring new opportunities to fight back against the threat of fraud. Slowly but surely, fraud monitoring system sophistication is providing banks and lenders with the weaponry they need to stay one step ahead of today’s fraudster.

Preventative Measures for Banks and Lenders

There are various steps that financial institutions can and should be taking to bolster their merchant fraud detection and prevention protocols. What has become clear over recent years is that the key to overcoming the intensifying threat of fraud lies in adopting a combined approach – one that incorporates sophisticated modern technology and old-school preventative measures.

The appropriateness of any given strategy or solution will always vary in accordance with the requirements of the institution in question. Nevertheless, there are several tactics and techniques of universal value that are already proving beneficial for the banks and lenders adopting them.

A few key examples of which include the following:

Artificial Intelligence and Machine Learning

This is predicted to be the single most powerful and important weapon in the 21st century bank’s arsenal for the years and decades to come. Already considered a true game-changer by many, artificial intelligence and machine learning enables banks and lenders to go beyond traditional ‘static’ fraud detection and prevention methods to inject intelligence and intuition into the mix. 

What makes the difference with AI is the way in which sophisticated computer networks are programmed to ‘learn’ from the millions of transactions and activities they monitor and track, every hour of every day. This information is brought together to create a centralised ‘brain’ for the network, which can subsequently make decisions based on its own acquired knowledge.

With AI and machine learning, banks and lenders have the opportunity to prevent fraud from occurring in the first place by picking up on suspicious activity at the earliest possible stage. A far more convenient and cost-effective approach than simply dealing with the consequences of fraud after it has taken place.

Multi-Factor Authentication

This has already become a standard procedure for the vast majority of merchants and financial service providers alike worldwide. If anything, it is seen as perhaps the first step towards robust fraud prevention, making it more difficult for fraudsters to bypass the most rudimentary initial verification checks.

Multi-factor authentication is exactly that – a system wherein the individual or organisation attempting a transaction must provide verification of their identity.  

For example, if an unusually large transaction for an account was suddenly attempted from a location far from the account holder’s registered address, it could automatically trigger an alert and a subsequent authentication request. A relatively basic approach to fraud detection and prevention, but one that works, nonetheless.

Monitoring and Scrutinising Transactions

Whether through the use of automated software or with old-fashioned manpower, it is the responsibility of all banks and lenders to continuously and meticulously scrutinise transactions. Adopting the ‘ignorance is bliss’ approach only to plead innocence when things go wrong is no longer acceptable.  

Even if you can technically deny liability having not directly broken any laws, failing to spot the signs of fraud can put a real dent in customer confidence.  Reconciling accounts daily, monitoring transactions and generally taking a more proactive approach to fraud detection and prevention is something more banks and lenders should be doing.

Creating a Culture of Fraud Awareness

Just as important as the above is creating and contributing to a culture of fraud awareness, both within the confines of the organisation and on a wider level.  Despite the growing risks posed by increasingly sophisticated fraudsters, evidence suggests that far too many banks and lenders are still burying their heads in the sand to the whole thing.

One of the few things all experts in fraud prevention agree on is that major change will not come about until all financial institutions acknowledge and accept the risks they face. Only then will it be possible to create a unified front against the prevalence of fraud, and for banks to benefit from the collaborative efforts of all involved.

Particularly where artificial intelligence and machine learning is concerned, it really is a case of strength in numbers.

If you would like to learn more about artificial intelligence and machine learning for proactive fraud detection and prevention, contact a member of our team anytime.

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