Your fraud detection model is malfunctioning

Your fraud detection model is malfunctioning

Many fraud prevention models are unable to keep up with current threats because they focus more on transactions rather than the identity aspect.


Fraud poses a significant challenge to the financial services industry at present. In the past twelve months, all fraud decision-makers at banks and fintechs reported experiencing fraud. Additionally, 96% of them suffered financial losses due to fraud in the previous year, and 70% indicated losses exceeding $500,000 during that period.


Unlike publicly reported data breaches, fraud tends to occur behind the scenes, posing a struggle for banks and fintech companies. However, despite its lower visibility, companies are now investing more in fraud prevention technology than ever before. Recognizing the importance of risk prevention in achieving sustainable growth, organizations are elevating risk officers to C-suite roles.


However, despite increased investment, many companies still struggle to keep pace with the fraud problem. Various factors contribute to this, including the heightened sophistication of fraudulent attacks. Nonetheless, one of the primary reasons for the failure of companies’ fraud prevention strategies is their focus on monitoring transactions instead of customer identity.


All types of fraud ultimately involve identity fraud. FinCEN’s Acting Deputy Director, Jimmy Kirby, supports this view, stating that identity is crucial for the effectiveness of every financial institution’s anti-money laundering/counter-financing of terrorism (AML/CFT) program, regardless of the type of financial service used by customers.


Notably, in 2022, FinCEN received over 350,000 Suspicious Activity Reports (SARs) related to identity theft and more than 600,000 SARs reporting the use of false or fraudulent identification records.


Behind every fraudulent transaction, there is always an identity that benefits from it. Even in cases of various fraud types, such as payments fraud, synthetic fraud, or account takeover fraud, there is an individual who ultimately benefits from the fraudulent activity.


At iPass, we believe that by correctly answering the following questions, most fraud can be prevented:

  1. Is the person using a stolen identity?
  2. Is the person using a synthetic identity?
  3. Have they taken over an account?
  4. Are they committing fraud or likely to do so under their own name?


Currently, identity decision-making is already part of the onboarding process for banks and fintech companies, serving as a vital aspect of meeting regulatory requirements like Know Your Customer (KYC) and AML. However, organizations have an opportunity to continue focusing on identity throughout the customer lifecycle.


People Steal Money


Historically, the financial services industry has framed fraud as “money being stolen.” This approach leads banks and fintechs to view fraud solely on a transactional level, searching for irregular, atypical, or suspicious transactions. Such a narrow and reactive approach to risk management is akin to hiring an employee without any interviews or ongoing assessments based solely on their work outputs. This approach often results in poor employee fits.


Understanding a person’s identity and capabilities, as well as assessing their ongoing performance, is essential for identifying fraud. Similarly, to prevent fraud effectively, it is necessary to get to know customers and gain insights into their behaviors and potential fraud risks.


Contrary to popular belief, fraud is not solely about “money being stolen.” It is fundamentally about “people stealing money.” Shifting the focus from analyzing transactions to analyzing entities not only helps prevent fraud but also enables better prediction of potential future fraudsters.

The Path Forward


The way forward involves addressing the threat of fraud, which hinders banks from delivering the user experiences demanded by their customers. Simultaneously, fintechs


hesitate to seize growth opportunities due to concerns about onboarding inappropriate customers or neglecting compliance measures. As a result, individuals and businesses face limitations in accessing the financial products they need and expect.


However, there is a solution. By effectively managing identity risk, companies can proactively address the identity problem in the financial services industry.