COMMENTARY

Banking executives face numerous challenges in combating financial crime, particularly with the emergence of new technologies that enable

sophisticated fraud methods

. Staying vigilant is crucial in protecting against these emerging threats. In the near future,

synthetic identity fraud

and account takeovers will become increasingly prevalent, with AI and machine learning rapidly adapting to a bank’s detection methods. While most banks recognize the importance of fraud prevention, having a clear strategy and best practices is essential to mitigate the rising risks posed by these evolving technologies.

Risk of Fraud and Financial Crimes Grows

Last year, US fraud losses totaled $12.3 billion, and the emergence of new technologies will further exacerbate financial crimes.

Research from Deloitte

expects US fraud losses to grow to $40 billion by 2027, representing a compound annual growth rate (CAGR) of 32%. The increasing use of generative AI is one reason why bank fraud is growing. At Grasshopper, we’ve seen

fraudsters attempt to utilize generative AI

(GenAI) to create fake business profiles and descriptions when applying for small business loans. To combat this, banks need to implement advanced AI-driven fraud monitoring and detection tools, enhance identity verification processes, and maintain vigilance with continuous monitoring and staff training to recognize anomalies.

The growth of banking-as-a-service (BaaS) and embedded banking has also created more opportunities for malicious actors to exploit gaps in fraud prevention. In this model, banks lose direct connection with the end user, adding complexity to fraud prevention efforts. BaaS and embedded finance solutions offer significant advantages for modern banking, but they also present new challenges in fraud prevention.

PYMNTS.com reports

that malicious actors are targeting application programming interfaces (APIs) — serving as the bridge between banks and their BaaS partners — as entry points. Earlier this year, attacks on APIs increased by 20% year over year. Although the benefits of BaaS far outweigh the risks, fraud activity continues to accelerate. To stay protected, banks and their BaaS partners need a systemic approach to manage risk tolerance across the platform and protect themselves and their clients.

Implementing Best Practices for a Strong BaaS Partnership

Banks and BaaS partners who collaborate closely to continuously improve their risk programs can navigate the evolving risks and rewards of AI. To be effective in preventing fraud, it’s essential to have a shared understanding of the risk appetite and compliance program. In some cases, this may mean the bank has to decline a potential BaaS partnership if the partner doesn’t align with the bank’s risk culture. A shared understanding should be established at the onset of the relationship, and partners should regularly review it to ensure they remain aligned, as risk appetite is always evolving alongside growth.

The partnership should clearly define roles and responsibilities to create clarity and transparency in the fraud prevention strategy. Professionals involved in the relationship should understand how responsibilities are allocated to create a solid foundation for the risk framework. By sharing resources through joint training programs and guides for new regulations or threat activity, teams can ensure a robust program that identifies and actively closes gaps. Regular audits and swift, actionable responses are crucial to eliminate vulnerabilities, keeping fraud prevention strong and resilient. By embracing these strategies, banks can drive the innovation economy forward while safeguarding against financial crime.

The Human Response Is Essential

While technology plays a critical role in a successful fraud prevention program, it cannot stand alone. Human analysts have an innate ability to detect suspicious behavior that may elude automated systems. Skilled anti-fraud professionals can identify subtle signs that machines miss, making human oversight essential in preventing banking fraud and

financial crimes

. As the banking industry evolves and forges relationships with new partners, these partnerships can introduce new fraud risks. However, by understanding the threats, building strong collaborations, and investing in advanced detection tools, banks can stay one step ahead and protect themselves and their clients.