Good vs. Bad: Fraud Losses at FIs Up 65% as Both Sides Turn to AI

Fraud and financial crime remain challenging for financial institutions (FIs), even as fraud rates have remained high for many of them in 2023 relative to 2022 figures — a year in which 70% of FIs experienced increased fraud over 2021. At a time of the year when payments and banking transactions multiply due to the holiday shopping season and many companies’ financial closures, consumers need to be more vigilant than ever to avoid scams, and FIs are putting in place the necessary resources to combat fraud.

According to a recent report by PYMNTS Intelligence in collaboration with Hawk AI, “Financial Institutions Revamping Technologies to Fight Financial Crimes,” nearly 43% of FIs in the U.S. experienced an increase in fraud this year relative to 2022, resulting in a rise in fraud losses increasing by about 65% from $2.3 million in 2022 to $3.8 million in 2023, as per PYMNTS Intelligence data.

FIs are increasingly adopting advanced technologies like artificial intelligence (AI) and machine learning (ML) to combat the growing threat of financial crimes and dedicating efforts and investments to do so. As extracted from the PYMNTS Intelligence research, 66% of FIs are utilizing these technologies alongside a mix of in-house systems and third-party provider options to combat fraud, up from 34% in 2022. 

One example of an AI application to combat fraud was launched in September by the financial software company Finastra. The new tool “Compliance-as-a-Service” for banks and available on Microsoft Azure includes real-time anti-money laundering transaction screening artificial intelligence (AI)-powered transaction monitoring. The growth in the number of fraudulent transactions and higher value of fraudulent losses spotlights the fact fraudsters are getting better at bypassing legacy defenses. “Upgrading solutions and systems to also include machine learning (ML) and AI is really the only way [forward],” the company said in a press release.

Individual consumers are often the main targets of fraudsters, especially during peak sales seasons. Scams accounted for 12% of fraudulent transactions, with bank tech support impersonation and IRS scams being the most common. While account information misuse remains the leading type of fraud, each FI lost an average of nearly half a million dollars related to scams in 2023, as per PYMNTS Intelligence data.

Galileo Technologies Chief Product Officer, David Feuer, explained in a recent interview with PYMNTS that fraud attack vectors are challenging, and FIs and digital providers can harness data to educate and defend consumers and enterprise clients. “The expectation seems to be that everything is digital, and if it’s digital, they’ve learned to trust it, and that’s a poor assumption,” he said of vulnerable individuals. 

In this regard, senior-focused financial platform Charlie has recently introduced a suite of fraud protection tools for older Americans. The solution uses data about 62-and-older consumers’ static habits, patterns and preferences to help combat financial crimes against older Americans.

Looking ahead, FIs are planning to revamp their efforts to combat fraud over the next three years. 70% of FIs will rely on third-party solutions for AI, ML, and fraud scores provided by payment processors, as per the same PYMNTS Intelligence research. As financial crimes continue to evolve, FIs will continue to adapt their strategies and leverage the latest technologies to protect their customers and maintain the security of the financial services industry.