Identifying the fake: banks prepare for emerging fraud risks

June 2025  |  FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

June 2025 Issue

In today’s financial climate, fraud poses significant risks to companies. It is now one of the most frequently reported crimes, making it imperative for organisations to allocate sufficient resources to safeguard themselves.

The threat is particularly significant for companies in the financial services sector. Due to the nature of their business, banks, building societies and other financial institutions (FIs) are prime targets for fraud-related crimes, given the substantial amounts of money and sensitive data involved. For banks and other FIs, the scale of the problem is immense, as they contend with a multitude of emerging fraud risks.

Direct and indirect costs of financial fraud

The urgency for better fraud prevention is not just driven by regulations; it is a business necessity. The global cost of financial fraud is expected to surpass £500bn annually, with cyber criminals leveraging increasingly sophisticated techniques such as deepfake social engineering, synthetic identities, and artificial intelligence (AI)-powered money laundering.

The direct cost of fraud is substantial. According to Alloy’s 2024 State of Fraud Benchmark report, 57 percent of respondents – including banks, FinTechs, and credit unions – reported that their organisation lost over $500,000 in direct fraud losses during 2023. Additionally, over one-quarter of respondents experienced direct fraud losses exceeding $1m during the same period.

Direct fraud losses represent the actual amount of money stolen due to fraudulent activity. There are also indirect fraud costs that financial services companies incur, such as expenses related to investigating and recovering fraud funds, loss of customers and reputational damage.

In 2023, fraud in all its forms accounted for over 40 percent of reported crime in the UK, according to the UK Finance Annual Fraud Report 2024.

Fraudulent transactions are becoming increasingly common across the financial services industry. According to NICE Actimize, attempted global fraud transactions surged by 92 percent, and attempted fraud increased by 146 percent in 2022 compared to the previous year.

In 2023, digital payment fraud schemes resulted in projected losses of $485.6bn worldwide, according to the Nasdaq Verafin 2024 Global Financial Crime Report.

These figures highlight several key issues, including the significant rise in overall transaction volumes and the growing boldness of malicious actors. Fraudsters are increasingly targeting higher amounts and diversifying their attack vectors. Today, fraud is not confined to a single channel. Driven by digital transformation and changing consumer behaviours, financial fraud has become a complex, multichannel threat, characterised by new and strategic fraud patterns.

In this context, banks and other FIs must remain vigilant and proactive, continuously adapting their defences to stay ahead of the ever-evolving fraud landscape. However, there is also pressure on governments and regulators to step up their game.

In the UK, for example, the government is actively working to counter fraudulent activity through initiatives such as the Economic Crime Plan 2.0, which prioritises anti-fraud measures. Additionally, the EU is making ongoing efforts to enhance financial security.

Regulatory bodies are also intensifying their efforts. The European Banking Authority has introduced enhanced fraud reporting requirements, while the Financial Conduct Authority is advocating for stricter cyber security and fraud disclosure regulations.

The escalating threat of sophisticated fraud

Malicious actors are employing various evolving tactics, particularly by exploiting gaps in traditional payment methods such as credit cards and cheques, as well as in emerging payment technologies and financial services, including open banking.

While banks and FIs are intensifying their efforts to counter existing threats, new generations of fraud and attack vectors continue to emerge. Fraudsters’ tactics are evolving, and the vulnerabilities that FIs must address to stay ahead are escalating. There is a growing sophistication in fraud tactics, including deepfakes, synthetic identities, and the rise of fraud as a service – all of which are set to disrupt traditional fraud detection methods.

While data, AI and increasingly sophisticated technologies are central to the fight against fraud, the increased use of digital channels also exposes banks and other FIs to a wider range of sophisticated threats, such as account takeovers, synthetic identity fraud, real-time fraud schemes, and more.

According to NatWest, the fastest-growing types of fraud in 2024 were AI-powered, accounting for 34 percent of crimes. While digital fraud and the growth of financial services technology are areas of particular importance and concern, opportunities for fraud and financial crime are increasing, especially as the banking and financial services landscape becomes more competitive, particularly in the lending environment.

Increasingly, bad actors are becoming more adept at leveraging industry innovation and the power of evolving technology to plan and execute sophisticated attacks. The scale of illicit activity continues to grow.

For example, synthetic identity fraud is projected to generate at least $23bn in losses in the US alone by 2030, according to Deloitte. According to a US Federal Reserve report, synthetic identity theft is the fastest-growing financial crime in the US. By utilising stolen social security numbers and manipulating personally identifiable information, fraudsters apply for credit through their new profiles, hiding their identities.

There are many reasons why cases of synthetic identity fraud will continue to rise, the most notable being that many banks are slow or simply unable to stop it from happening. Without the necessary internal controls at banks, the success of synthetic identity fraud will continue to grow until banks take a hard stance against it.

The adaptability and sophistication of the attacks and tactics being developed and deployed by cyber criminals are concerning. These criminals are continuously adapting their tactics to exploit the weaknesses of digital payment methods across various channels, such as mobile and online transactions, making it increasingly challenging for banks and FIs to identify and prevent fraudulent activities.

The payments space is particularly fertile ground for scammers and cyber criminals. Technology has rapidly evolved in recent years, and new digital payment methods have emerged, making daily transactions quicker and more convenient. These advancements enable banks and FIs to cut costs and streamline operations.

As digital payments have become more commonplace, sophisticated scamming techniques have also been on the rise. Today, fraudsters are highly adept at employing innovative methods and leveraging the latest technology to gain unauthorised access to user accounts. To counter such activities, organisations need to stay one step ahead. Increasingly, they will be looking for trust, privacy and efficiency within their tools and technologies.

‘Cyber crime as a service’ (CaaS) is another area that can cause significant issues for banks and FIs. CaaS involves criminals using tools to commit mass fraud on behalf of other criminals. If financial services firms are slow to adapt to this evolving threat, they may find it harder to protect customers’ money and personally identifiable information. According to Field Effect, CaaS is a growing segment of the cyber crime ecosystem, generating annual revenue of over $1.6bn. Fighting against CaaS, like any other form of cyber crime, requires banks and FIs to have a robust cyber security plan in place.

AI-driven fraud detection: leading the charge

FIs are responding with significant investments in AI-driven fraud detection, with major banks such as HSBC and Barclays leading the way. However, despite these advances, fraudsters continue to exploit gaps between institutions, operating across multiple banks, FinTechs and payment processors.

Banks and FIs are deploying technology solutions wherever possible to guard against malicious activity. Digital transformation and rapid developments in the real-time payments space are continuing to transform markets. These innovations allow providers to offer their customers increased speed, better efficiency and 24/7 availability.

Firms are clearly focusing on advanced analytics and AI. According to a LexisNexis Risk Solutions survey, process automation and machine learning were key areas of focus for a majority of respondents. The 2024 True Cost of Compliance report indicates that 40 percent of respondents have already adopted these new technologies into customer due diligence processes, and a further 58 percent plan to do so within three years.

As a result, technology spending is expected to continue being a key driver of firm-level financial crime compliance costs, pushing them up by an estimated 6 percent over the next three years. Alongside AI adoption, firms are also prioritising data, with the majority expecting to improve data quality and augment existing data sources.

In the UK, financial services firms are spending more than £21,000 per hour fighting financial crime and fraud through onboarding and compliance screening processes, according to the True Cost of Compliance report from LexisNexis Risk Solutions. The study of 254 regulated UK financial services firms found that compliance costs rose by 12 percent in 2023, with 95 percent of firms reporting an increase. Only 2 percent of firms reported that costs had fallen.

Collectively, the sector is now spending an astronomical £38.3bn on compliance each year. Costs have risen by 33 percent since 2021 – well above the rate of inflation. Yet, the National Crime Agency estimates that at least £36bn is laundered in the UK each year.

Unfortunately, some banks and FIs are failing to keep pace with the rapidly evolving landscape. Many commercial banks are struggling to address the threat posed by fraudsters, with two-thirds unprepared for emerging fraud risks, according to a new research-based whitepaper by Themis and Bottomline.

AI and machine learning are likely to be extremely important in identifying and combatting fraud in the financial services sector. Previously, FIs used rules-based systems to identify suspicious transactions. However, as fraudsters employ increasingly sophisticated tactics, these traditional methods are proving inadequate.

Increasingly, banks and FIs are turning to AI-powered systems, which can utilise vast data sets and advanced machine learning algorithms to learn from historical fraud patterns and adapt to emerging threats in real-time. AI and machine learning can provide dynamic risk scoring, reduce fraud losses and enable real-time interventions. According to Boston Consulting Group, incorporating AI can reduce fraud-related losses by up to 30 percent annually.

Similarly, machine learning is transforming anti-money laundering (AML) processes. Traditional AML methods relied heavily on manual reviews and static thresholds, whereas AI and machine learning systems can process and analyse complex transaction patterns, strengthening AML processes and increasing the speed of data analysis.

But heightened competition has prompted banks to explore alternative sources of revenue and rapidly adopt new technologies, sometimes outpacing the capabilities within their risk-management frameworks. Unmanaged innovation risk is now an area of particular concern. Banks and FIs deploying AI technology must have staff who understand how AI works, easy access to experienced data scientists, and the ability to integrate data sources into their workflows. Organisations must have policies and procedures for AI technology in place before deploying it.

For all emerging fraud risks, from CaaS to synthetic identity fraud, it is crucial that banks and FIs implement robust measures to protect themselves. Fraud risks will always exist, so banks and FIs must take all necessary steps to safeguard themselves, their data and their customers in an increasingly challenging landscape.

© Financier Worldwide

BY

Richard Summerfield