The modern era’s demand for digital-first services creates new opportunities for fraudsters and financial criminals to succeed in their illicit activities. While fraud and money laundering are nothing new to the financial sector, it continues to be one of the major issues faced by banks.
Risks for financial institutions
In the traditional banking system, customers would have to visit the branch for account opening and go through several steps for identity verification. However, online customer onboarding systems have changed the process, changing the dynamic.
Digital onboarding has resulted in an innovative and effective way to open accounts and get new customers banking quickly. Yet without the right partners and technology, it can sometimes prove challenging. Meeting AML and compliance goals should always be front of mind for an institution.
With fraudsters coming up with innovative techniques to manipulate the digital platforms of banks, a significant spike in fraud attacks was seen in the last year. Banks making an annual revenue of more than $10 million became victims of 2,320 fraud attacks in 2021, compared to 1,977 in 2020.
This wasn’t the only number that increased. US financial service providers reported a $4.00 recovery cost for every $1 lost to fraud. Prior to the Covid-19 outbreak, it was $3.64. Fraud costs include internal recovery costs, the amount for which the financial institution is held liable, legal penalties, and investigation costs.
Furthermore, online banking platforms had to deal with 33% of US banks’ fraud costs in 2021, compared to 26% in 2020. Similarly, mobile transactions accounted for 29% of fraud costs compared to 20% in the previous year.
The only medium for banking services that accounted for lower costs in 2021 was in-person banking. The study also revealed that several types of fraud affect every stage of customers’ banking experience – from account opening to registration to making transactions or applying for loans.
Fund distribution was identified by 43% of the respondents of a survey about US banks as being the stage that is most vulnerable to fraud. Account registration and login are the second most susceptible to fraud. Banks reported that accurate identity verification is a real challenge for mobile devices at any stage of a customer’s banking journey.
Regulatory pressure and compliance penalties
Based on research reports, user experience is the top priority of almost 70% of customers when they choose between different products and services. Keeping the facts and the numbers in front of them, online banking platforms are now focusing on improving customer experiences and offering the most seamless services, particularly in the onboarding stage. However, this process isn’t free of regulatory requirements and obligations.
Banking processes are flooded with obligations of performing identity verification, transaction monitoring, and AML screening of their clients during the onboarding process. The process of customer due diligence requires banks to incorporate AI-driven solutions that prevent illegitimate entities from accessing digital banking services. Know Your Customer (KYC) is crucial in online banking, not only for onboarding legitimate clients but also for fulfilling the requirements of regulatory authorities.
Money laundering
Banks and financial institutions face the constant threat of becoming involved in money laundering and getting fined by regulatory watchdogs. The Financial Action Task Force (FATF) and the UK’s Financial Conduct Authority (FCA) are only two of the many regulatory authorities that have repeatedly sent warnings and fined some of the most prominent banks worldwide. These financial regulators serve the purpose of securing banks and their customers from fraud, money laundering, and terrorist financing.
Several loopholes in the banking and finance sector are revealed when a financial watchdog takes such an action against a bank. The lack of adequate AML measures opens doors for fraudsters to use the bank as a channel to clean their illegally obtained funds.
Digital onboarding
At the beginning of a customer’s banking journey, the account opening is where identity fraud is prevalent. Here, the absence of an accurate identity verification solution can mean an open route for fraudsters to access the system by using stolen or fake identities.
On-site fraud
It can’t be said that the next stages after digital onboarding are fraud-free either. This is because once an illegitimate entity has bypassed verification to breach the system at the onboarding stage, they can quickly get through verification steps at the actual branch of the bank and carry out transactions. Considering the various tools and technologies to prevent fraud and financial crimes in the banking sector, it’s up to the institution to find the balance between compliance penalties and fraud losses.
Key Takeaways
Eliminating the chances of fraud by following compliance guidelines enables financial institutions to streamline their processes. It also makes it easier for customers to trust the security of their services. For banks that struggle to develop the most optimum solutions for their clients, Shufti Pro offers an identity verification solution that supports 150+ languages in 230+ countries.
This way, banks can close down the loopholes in their customer verification systems.
Want to know more about ShuftiPro and its partnership with Pismo? Read all about it on our partner page.
