Digital Banking Fraud: Types, Detection Methods, and Solutions in 2024

Digitization is changing how banks work, offering a faster and more convenient way of doing business and a variety of services anytime and anywhere in the world. But as we say, we shouldn't forget that these advancements also come with a darker side, like digital banking fraud. 

A large number of financial institutions, if not most of them, are investing in advanced AI-powered technologies to detect and prevent Internet banking fraud before it affects their clients because when these clients fall victim to Internet banking fraud, they often face not only financial losses but also emotional distress from dealing with identity theft.

These online banking fraud detection systems empower FIs to minimize the risk and flag suspicious activities in real time. 

Key Takeaways

• The different types of digital banking fraud
• How it happens
• What banks can do to protect themselves against digital banking fraud?

What is Digital Banking Fraud?

Traditional banks usually require people to come in person to do any paperwork like opening an account, but when those services became digitized, they opened the doors wide to criminals who commit digital banking fraud. 

Criminals commit digital banking fraud when they use online platforms like banking apps or websites to steal money or sensitive information. The fact is that more and more people are turning to online and mobile banking, and this entices fraudsters to work harder and smarter to gain unauthorized access to the data that powers the entire financial system. 

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Why is Digital Banking Fraud on the Rise?

When anything becomes digital, it creates opportunities for fraud, be it mobile banking, digital wallets, or instant payments. These tools make life more convenient for customers but riskier for everyone; customers, banks, & investors. Let's take real-time payments as an example, they do allow money to move quickly which is good, but also so quickly that it can be difficult to track and recover once stolen. 

When banks decide to offer digital services, they should come well-equipped with anti-fraud prevention tools and never allow for the lack of security features like strong encryption or multi-factor authentication (MFA). This is especially true because many of these fraudsters do not work solo; on the contrary, they operate in highly organized groups (and are most probably well-funded) that use advanced tools like artificial intelligence to improve their attacks. 

In addition to that, the threats sometimes come from inside the bank itself; from employees or contractors who have access to sensitive information. They don't necessarily do it on purpose; it can be accidental too, but regardless, insiders are especially dangerous because they have access to the system and thus can cause serious damage. 

How Does Digital Bank Fraud Happen?

There are a wide range of methods to break into bank's systems or trick customers, and some of the most common ways are:

1. Malware and Ransomware

You have probably heard of this method before. It occurs when fraudsters send emails with attachments that, when opened, install malware on a bank's or customer's device. They usually lock a system and demand a ransom to unlock it. These attacks can be devastating, particularly if they hit a bank’s core operations.

2. Account Takeover Fraud

Account takeover can be the result of different fraud techniques like phishing or data breach, but ultimately they get the criminals access to someone else's bank account, once inside, they can transfer money or make purchases. 

It is worth noting that account takeover is a type of digital banking fraud, but it involves specific methods and techniques used by fraudsters to execute the fraud.

3. Man-in-the-Middle Attacks

In a Man-in-the-Middle attack, a criminal intercepts the communication between a customer and the bank. For example, if you’re on an unsecured Wi-Fi network, a fraudster might “listen in” and steal sensitive data like your password or account number.

4. Phishing and Social Engineering

Phishing is when criminals trick people into giving up personal information, like passwords or bank details. They might send an email pretending to be the bank, a text message (smishing), or even a call pretending to be customer support (vishing). This type of fraud preys on human error and can be very effective.

Types of Digital Banking Frauds

The methods and techniques we discussed in the previous section of this article are used by fraudsters to carry out the following various types of fogtal banking fraud. 

1. Mobile Banking Fraud

If fraudsters had a favorite target, that would most probably be mobile banking fraud, where they gain full access to someone's banking application, then they would have all the freedom to steal sensitive information or make online purchases. 

2. Card Not Present Fraud (CNP)

E-commerce platforms are generally vulnerable to this type of fraud because criminals use stolen credit card details to make online purchases from those platforms. Since the physical card does not have to be present to buy things, card-not-present fraud is so difficult to detect. 

3. Synthetic Identity Fraud

These fake IDs are usually a mix between real and fake data so, for example, a real social security number with a fake first and last name. It is often that fraudsters use these synthetic identities to open bank accounts and/or apply for credit cards using digital services. 

4. Online Banking Fraud

Fraudsters target online banking platforms through various means, like credential stuffing (using stolen login details) or by exploiting weaknesses in the bank’s online systems. These attacks are often automated and can hit multiple accounts at once.

5. Business Email Compromise (BEC)

In Business Email Compromise, fraudsters send fake emails pretending to be company executives to trick employees into transferring large sums of money to fraudulent accounts. 

Digital Fraud: Risks and Challenges for Financial Institutions

Digital fraud creates a range of challenges for banks, from financial losses to reputational damage. Here are some of the biggest risks:

1. Operational Disruption
2. Regulatory Compliance
3. Technology Gaps
4. Human Error

Online Banking Fraud Detection

To prevent fraud, your measures should start from the first interaction between your bank and the customer, and this means the bank needs to stay on top of all regulations:

1. Follow KYC and AML Requirements

KYC and AML must be integral to any financial institution. Let's say someone requests to open an account using the digital banking services your bank offers. The first step would be to verify the identity of this customer to ensure they're not using a fake or stolen ID. 

The customer screening process would also include conducting customer due diligence and assigning this customer a risk score or rating. This process wouldn't stop there but would continue with ongoing monitoring to ensure:

• Monitoring the status of these individuals so that if their risk profile increases, they undergo enhanced due diligence. For instance, if someone becomes a government minister (which classifies them as a PEP or Politically Exposed Person), they would need PEP screening and be associated with a higher level of risk.
• The customer does not operate in a high-risk country or jurisdiction.

If the bank gets these steps right, it would significantly reduce the risk of falling victim to fraud.

2. Monitor in Real Time

If the bank does not have a system that monitors transactions in real-time, many fraudulent transactions won't be flagged before the fraud is completed, but if they have such advanced systems in place, these anti-fraud systems give the bank a chance to spot the fraudulent activity and flag it as suspicious just in time!

3. Use Strong Authentication

If you were to choose between using just a password and a fingerprint to access your bank application, which would make you feel safer? Better than both is using multi-factor authentication (MFA), which means a password, fingerprint, or temporary code. 

How Can FOCAL Help with Digital Banking Fraud Detection

Any financial institution, be it a bank, a fintech, or else, needs a strong and reliable digital banking fraud detection system to protect itself against fraud. But what do we mean by strong and reliable? What makes one system powerful and another less powerful?

FOCAL Fraud Prevention solution is powerful because it continuously monitors customers' transactions and sends timely alerts when anything looks suspicious. The solution streamlines and automates the whole KYC and AML process.

What makes the FOCAL platform stand out is the solution’s use of machine learning to detect fraud. What does this mean? The platform keeps learning and improving as financial crime evolves, so it does not stay the same. The more data there is, the better the platform gets.

Read more: Best Fraud Detection Software: 6 Companies Compared in 2024

Last Thought

Financial institutions are constantly updating their security measures to combat various types of online banking fraud that threaten consumer safety. Common types of online banking fraud include phishing scams, account takeovers, and unauthorized wire transfers, each requiring specific preventive measures.

Each scam, breach, or trick is a challenge and a lesson. Rather than chasing down the latest threat, what if financial institutions saw fraud as an opportunity to rethink how they do business altogether?

Flexibility and adaptability might be one of the keys to detecting digital banking fraud because fraud is not going to disappear. It is actually becoming more and more organized and operating on a large scale, but also innovation won't stop, and so a mindset shift and viewing fraud as part of the digitization process can lead to a more open, innovative, and adaptable approach to fighting against fraud.