Fraud prevention in real-time: how US banks can stay ahead of the criminals

Thought Leadership· 3min July 7, 2023

Getting to grips with fraud is a major priority for the financial services industry. It’s a seemingly never-ending battle; new threats emerge all the time, existing threats evolve and fraudsters continually change their tactics.

And where there is fraud, regulatory scrutiny is bound to follow. The US government is currently looking very closely at fraudulent activity in the digital assets space in particular right now. The White House is also supporting educational campaigns to make people aware of the dangers of fraud in this area.

It’s a battle that needs to be fought on multiple fronts in order to be effective. Banks should also be looking at how they can enhance their fraud detection and prevention activities now more than ever. And as the US payments industry prepares to make the leap to a fully-fledged real-time environment, the risks are especially high.

New payment technologies mean fraud attempts will rise

With FedNow going live this year, it’s inevitable that we will see a rise in fraudulent activity. For banks in the US that want to be part of the real-time payments revolution, fraud detection and prevention is just one of the headaches they currently have; there is also the problem of making sure they have the technology and capacity to actually deal with real-time payments.

The only real solution is to avoid the problem altogether. And the only way to avoid the problem altogether is to build a system that allows for the application of increasingly new technologies for the monitoring of fraud because the volumes and the speed at which these transactions are processed can only be handled by highly sophisticated technology and the application of artificial intelligence. You cannot do this if you're still operating on a mainframe platform.

Banks need trusted partners to help them fight fraud

The question for banks then becomes how they build such a system. It would require an enormous amount of resources; few banks would be able to find the necessary investment even without a mid-2023 deadline looming. So, then, banks need to look to third-party partnerships in their attempts to mitigate the risks of fraud.

Banks are, of course, already spending a great deal on fraud detection and prevention. We have seen a massive increase in spend to try and head off the surge in activity, which has manifested in two ways. Firstly, banks are hiring information security experts. Right now, InfoSec people are the group among all engineers that are in the highest demand.

Secondly, that spend is also manifesting in investment in new technologies and new technology partners that specialize in this space. More and more of the banks are coming to rely on third party companies to provide this service. This is part of the reason why spending on fraud detection and prevention is forecast to grow at a staggering rate in coming years; the global Fraud Detection and Prevention market is projected to grow to $65.8 billion by 2026 from $24.8 billion in 2021, at a Compound Annual Growth Rate of 21.5%.

Think digital first for payments and fraud prevention

The truth is, real-time payment systems will both contribute to and help solve fraudulent activity. Therefore, banks have to adopt new technologies, new processes, new approaches, and that's not only for fraud, but also for liquidity management, for sanction screening, everything associated with the payment flow.

For banks to operate effectively in a real-time world they’re going to need to plug and play on the fly or else you're going to be left behind. This approach brings flexibility. It brings security at scale. It brings overarching market oversight. These benefits are not accessible to individual banks on their own without leveraging a third-party provider.

The US government is throwing its weight behind FedNow — it has pledged to use instant payment systems for its own transactions where appropriate such as in the context of distribution of disaster, emergency or other government-to-consumer payments — and the White House has also mentioned plans to create a federal framework to regulate nonbank payment providers very recently. Banks need to be aware just how closely the payments space is going to be watched in the coming months and years, because any slip-ups could prove to have a massive impact on their reputation. Look to trusted third party providers to mitigate the risks.

Written by

Dave Scola
Dave Scola Chief Executive - US

Dave joined Form3 in 2022 in order to lead the charge to bring Form3’s platform and capabilities to bear on the US market. 

Dave has worked in transaction banking for over 20 years and has joined Form3 from SWIFT where he was Chief Executive for the Americas, UK and Ireland with responsibility for the company’s largest relationship as well as its global securities business.  

Prior to SWIFT, Dave was the Global Head of Financial Institutions at Barclays, responsible for the bank’s correspondent banking, FI trade, flow FX, and liquidity management businesses for FIs. 

He has also worked at Deutsche Bank and Bank of New York in both product and strategy roles and across various products lines including cash, trade finance, custody and corporate trust. 

Dave holds a MSc in Development Economics from the School of Oriental and African Studies in London, and a BSFS in International Relations from Georgetown University.