Consumers are experiencing more fraud than ever before. Data shows that 11% of consumers who paid for groceries experienced payment fraud in March 2023 — an increase of 88% since December 2021. These experiences create concerns for consumers, who now question how merchants store and use their payment data.
Firms are not exempt from the rash of fraud. Failure to prevent increasingly sophisticated fraud schemes is costing firms customers. Firms are responding, however, by planning investments in fraud detection and management tools. Those using machine learning (ML) or artificial intelligence (AI) believe they will reap the benefits in the form of decreased overall fraud rates.
In response to enduring fraud and financial crime, solution providers focused on fraud prevention must ensure that their products can respond to these concerns. Financial institutions (FIs) must also review existing procedures and fraud mitigation tools and consider additional upgrades or investments, such as adopting AI solutions.
These are just some of the findings detailed in “The Next Chapter in Fraud: Using AI to Unveil Payments Intelligence,” a PYMNTS Intelligence and ACI Worldwide collaboration. This edition examines consumers’ and executives’ sentiments and concerns regarding fraud and explores the measures FIs are taking, including using AI, to help mitigate fraud risks. The report draws on insights from multiple proprietary research studies conducted since January 2022.
Key Findings
More consumers are experiencing payment fraud, making them hesitant to share or store updated data.
The share of consumers who have experienced payment fraud in the past 30 days has increased substantially in the last several years. In March 2023, 11% of consumers who paid for groceries experienced payment fraud. This share is up from March 2022, when 7.2% of consumers experienced payment fraud, and December 2021, when just 5.7% of consumers experienced payment fraud. The implication for businesses and fraud prevention technology companies is that the measures they have in place are not keeping up with evolving fraud schemes. Technology companies must consider more frequent updates to their solutions, and businesses must escalate the preventive measures they have in place.
Consumers’ concerns about fraud limit how they pay and store their payment data. Fears that bad actors will steal their data and concerns they are vulnerable to fraud make some consumers hesitant to have their stored payment information automatically updated. Regardless of generation, education, income or financial lifestyle, consumers share these concerns.
Concerns about fraud also impact consumers’ willingness to have payment information data aggregated: 45% of consumers are afraid of data breaches, and 34% feel more vulnerable to fraud. Payment service providers need to enhance security to grow adoption and usage.
Consumers interact with multiple businesses with payment components, such as online retail orders, utility payments or other recurring payments made using their banks. They expect those fund transfers to take place seamlessly and securely. Fear of fraud or data theft, however, is a top concern consumers have about using online bank transfers. Seventy-three percent of consumers are at least slightly concerned about security when making online bank transfers. Banks and businesses must ensure they continuously protect customer accounts and transfers from fraud. They would benefit from regularly communicating those measures to customers and offering financial assurances to soothe their fears.
Fraud’s increased sophistication is costing firms customers, and firms are responding with investments in greater fraud detection and management.
The stakes are high: 34% of FinTech and Big Tech firms have lost customers due to fraud or financial crimes. Firms face many obstacles when combating fraud, including fraud’s increasing rates and sophistication. Thirty-three percent of FinTech and Big Tech firms cited the increasing sophistication of fraud schemes as obstacles, and 32% cited the rising number of fraud and financial crimes. More than 1 in 4 FinTech and Big Tech firms note that current solutions cannot identify fraudulent transactions.
Fraud and financial crime solution providers must work with prospective customers to show how their investments in new technologies to combat fraud or financial crime can benefit bottom lines. They will also benefit from showcasing how their solutions address complex regulatory problems and reduce the costs that prospective business customers may incur due to reimbursing fraud-related losses. Businesses looking to mitigate those same issues will benefit from learning about such solutions and considering additional investments or upgrades to strengthen fraud detection and management. The latest solutions are not just about fighting fraud, however. They help vendors deliver intelligence to FIs, benefit fraud management and provide insights into consumer habits, economic stability, targeted solutions and services and more.
FIs are tapping AI for fraud prevention and are getting results.
Between 2022 and 2023, FIs experienced increased fraud rates with most payment methods. FIs are tapping AI to combat fraud: 66% of FIs with assets of more than $5 billion use ML or AI solutions in 2023, up from 34% in 2022.
Ninety-seven percent of firms with asset sizes of $100 billion or more — the largest category in our sample — are using ML or AI to combat fraud and financial crimes. FIs that used ML or AI were likelier to experience a decrease in the overall fraud rate and were less likely to see an increase in the overall fraud rate.
FIs are using various strategies to combat fraud — both in-house solutions and those developed by third parties.
FIs understand that there is no silver bullet to mitigate fraud and financial crime and are used to deploying multiple strategies to protect themselves. A close look at FIs reveals that 36% use in-house processes and technologies to identify fraud and financial crimes. Thirty-six percent use third-party technology. Smaller FIs are more likely to outsource to third parties: 28% of FIs with assets between $1 billion and $5 billion used third-party technology to combat fraud and financial crimes. This share compares to 20% of FIs with assets of $100 billion or more and 9.1% of FIs with assets of at least $25 billion but less than $100 billion.
Methodology
“The Next Chapter in Fraud: Using AI to Unveil Payments Intelligence,” a PYMNTS Intelligence and ACI Worldwide collaboration, examines how FIs address fraud, the fallout they encounter due to fraud schemes and the measures they take to mitigate it. The study also offers insights into consumer sentiments on the same topic. The study draws on data from multiple census-balanced consumer surveys: a survey of 2,056 U.S. consumers conducted between Jan. 10 and Jan. 13 regarding their experiences with and concerns about using online bank transfers; a survey of U.S. consumers conducted between Jan. 20 and Jan. 29 exploring their experiences and interest in credentials vaults that aggregate their payments information; and, a survey of U.S. consumers conducted between March 9 and March 14 about their experiences using various payment methods across shopping channels. The study also drew on surveys of executives: a survey of 200 business leaders from FinTechs generating at least $5 million in revenue conducted between Aug. 3, 2022, and Aug. 25, 2022, that explored the frictions and challenges FinTechs face in providing seamless service; and a survey of 200 executives with deep knowledge of fraud and risk operations, fraud strategy or fraud analysis working at FIs with assets of at least $1 billion conducted from March 29 to June 16.
