How AI Helps Fraud Prevention in Banking and Finance

Frauds remain the biggest challenge for the banking industry and its clients, leading to massive losses every year. Credit card is the most prevalent form of fraud and, according to one study, 270,000 cases of credit card fraud happened in 2019 alone. Most of the scams occurred with retail consumers, but companies and sometimes even banks have directly experienced massive losses following such fraud cases.

The financial business is now using state-of-the-art artificial intelligence technology to intercept these frauds as quickly as possible to stop them from happening. Let us see some of the key areas where AI is extensively used to identify or prevent financial fraud.

Fraudulent purchases

Cybercriminals often obtain bank account details or credit card details through different means and use them to do illegal transactions and siphon off the victim’s accounts. If transfers are not halted quickly, it becomes impossible to reclaim money and is frequently lost permanently.

Banks are now implementing machine learning algorithms that can detect irregular transactions almost real-time, avoid them from occurring automatically, and alert the authorities.

Phishing Scams

Cybercriminals target vulnerable people by sending them email links that claim to be mail from their bank. By clicking on a link, criminals can access their confidential banking or card information for fraudulent transactions. As per the new report of the computer protection firm ProofPoint, 9.2 million malicious emails were obtained from users in 2020. And, sadly, about 30 percent of phishing emails are available to vulnerable targets.

While banks are not directly involved in preventing such phishing scams, credit goes to email companies like Google. They already have sophisticated machine learning algorithms that warn the customer that this is a phishing mail and should not be clicked or sent to the spam box instead. Gmail’s machine learning blocks more than 10 million spam and malicious emails per minute.

False Insurance Claims

It is not rare for insurance providers to receive fraudulent insurance reports from persons and companies. If such allegations are not identified in advance, insurance firms could wind up paying insurance money to the scam claimant. Research estimates that insurance fraud results in a loss of at least $80 billion annually across all insurance lines, and the US alone saw a loss of $34 billion in 2019. One-third of the insurers conclude that fraud accounts for up to 20 percent of the premiums’ cost.

Bradley Peterson currently serves as Executive Vice President and Chief Technology and Chief Information Officer (CTO/CIO) for Nasdaq. Before Nasdaq, he served as CIO and EVP for Schwab Technology Services (STS), responsible for Schwab’s technology innovation, development, infrastructure and operations. He also has held senior executive positions at companies including Epoch Partners, Schwab, Pacific Bell Wireless and Pacific Telesis (now part of AT&T). He earned his master’s degree in management at MIT Sloan School of Management and a bachelor’s degree in systems science and economics at the University of California, Los Angeles (UCLA)

Tell us a bit about your background, and your interest in financial technology.

I’ve spent the bulk of my career working in technology and product engineering across telecom, e-commerce and financial service industries. I’ve been fascinated by how payments and transactions have developed over the years and seeing innovation happen in this space. I’ve been fortunate to have been involved in many of these new developments.

How well are financial companies adapting to the rapid pace of FinTech development? What fields are furthest ahead of the game, and what sectors are being left behind?

The financial industry has been very bullish on embracing fintech development, particularly companies that work on the B2C side — companies that developed the original ATM networks, debit card services, 24/7 access to our money and buying power. The adoption of the Internet and web services brought new innovations like PayPal and Amazon’s 1-Click in payments and online investing for many others, while mobile has given us another wave of innovation with services like Venmo and the ability to make transactions with smartphones and other devices. More broadly, I think the leading financial services innovators have done a relatively good job of incorporating the latest wave of communications innovations into new services for their customers.

What challenges do you see for FinTech development and disruption, both from a user’s perspective and from a regulatory standpoint?

The biggest challenge remains the need for more innovations in security protections and security enhancements. From the point of view of smaller fintech start-ups, there is the extra consideration in their business model to adhere to the current regulatory framework in their respective industry. For financial services start-ups, there’s a lot to consider in how you innovate, including how you assess and develop new technology.

What is your overall take on the present and future of blockchain?

We’ve seen blockchain being initially embraced by the B2C financial services world. There is a growing need for modernization in all corners of the financial services sector in terms of infrastructure and how operational systems work. And blockchain has been the biggest catalyst for studying and innovating our collective approach to modernizing essential record keeping functions of our industry. This is a multi-year, massive project. And I see blockchain technology having a key part in this new, exciting development.

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