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Top Trends to watch out for in 2023 regarding fraud and financial crime

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In today’s increasingly digital and hyper-connected world, fraud trends are constantly changing and evolving. The acceleration of digital initiatives by the financial institutions since the start of pandemic, has exponentially increased online fraud and financial losses. The digitalization boom has created numerous channels for fraudsters to exploit, soaring the fraud and financial crime losses to an all-time high across the globe. On top of that, use of new technologies is making fraud and financial crimes easier to execute, attracting more number of fraudsters.

The exponential rise in virtual marketplace, digital accounts, online activity and tech-savvy fraudsters will further increase the severity of attacks across digital touchpoints in 2023. Let us take a look at the trends in the financial crime and compliance landscape for the year 2023-

  • Technology Facilitating Advance Level Frauds:

The advancement in AI, machine learning, blockchain and RPA is helping fraudsters commit more damaging and robust frauds than those previously possible. Fraudsters are using techniques like GPS spoofing, device emulation, URL shortening, screen scrapping and others to emulate normal user behavior and evade detection. With fraudsters continually becoming more tech savvy and launching sophisticated attacks, 2023 will witness rise of advance level frauds. Some of the frauds that will steal the limelight in 2023 will be synthetic identity fraud, social-engineering frauds, chargeback frauds, BNPL and such others. In 2023 there is going to be a sharp increase in the use of deep fakes to launch identity frauds and extensive use of bots and malware by even amateur fraudsters to steal user information.

  • New Frauds Triggered by Omnichannel, Web3 and Metaverse

While omnichannel commerce is enhancing the user experience, it is also increasing the attack surface for fraudsters. With more and more retailers extending omnichannel capabilities, 2023 will see an increase in frauds owing to cybersecurity challenges and lack of unified user identities across digital and physical mediums.

With the rapid development of Web3 and blockchain technologies, the metaverse concept is attracting lot of attention from organizations and users worldwide. However, identity verification remains to be a prime challenge for Web3 organizations. The dearth of industry standards, security measures and regulations around this brand-new decentralised ecosystem, will cause fraudsters to increasingly target the metaverse platforms in 2023.

  • Rising Cryptocurrency Frauds

The highly volatile crypto-asset market will continue to remain attractive avenue for buyers/investors as well as fraudsters. And due to the dearth of regulations and effective protection mechanisms, cryptocurrency platforms will continue to be the soft target for fraudulent activities in 2023.

  • Changing Regulatory Landscape

With the continuously growing financial crimes and changing geo-political dynamics between key nations, 2023 will witness some radical changes in the regulatory landscape. Some of these changes would focus on improving collaboration and data sharing amongst regulatory authorities, self-regulation by FIs and banks, global crypto regulatory wave, imposing stricter fines, strong customer authentication and Open Banking standards, and strict control on customer’s financial activities amongst others.

Driven by the need to regulate crypto-asset market, in 2023 AML (Anti-Money Laundering) and CFT (Combatting the Financing of Terrorism) acts are expected to go through stringent renovations concerning digital assets. The new regulatory amendments will be likely to enforce crypto and other digital asset management companies to adhere with KYC, CDD, transaction monitoring and other AML requirements.

  • Strengthening KYC Capabilities:

To mitigate the growing complexity of identity frauds, vendors will continue to strengthen their KYC capabilities and also focus on providing perpetual KYC (pKYC). This will be facilitated through accurate identity resolution by building holistic customer profiles by integrating data from multiple channels, touchpoints, and even 3rd party data. Also accurate customer screening will require amalgamation of customer data with transaction data. Vendors will need to understand new behaviour changes for better customer screening, and use advanced analytics like AI-enabled scoring models, neural networks and clustering techniques, for enhanced entity resolution.

  • AI enabled Sanctions Screening

The growing challenges of sanctions screening like exponential increase in sanctioned parties, increasing government sanctions, data quality issues and legacy matching technologies will continue to drive vendors towards offering AI powered sanctions screening for improved detection accuracy and reduced false positives by providing more data points for matching and holistic risk scoring.

  • Centralised Fraud Detection System for Holistic Decisions

Vendors will increasingly move towards a unified approach to fraud detection by providing a centralized platform for anti-money laundering and anti-fraud. This will consolidate all the identity verification processes into one comprehensive platform to provide enhanced authentication and maintain compliance standards more efficiently. With an integrated platform, monitoring system and case management, holistic decisions across risk, fraud, compliance and marketing is realized along with enhanced customer experience. In 2023, increasing financial crime and fraud will stimulate centralized governance over many scattered solutions and consolidation of decisioning capabilities from onboarding throughout the customer lifecycle.

  • Federated Machine Learning

First-party data held by banks and FIs does not provide enough fraudulent instances to perfectly train the ML models. Data sharing across institutions and borders can solve this challenge and enable accurate fraud risk modelling but bring in the concern of data privacy and compliance. To benefit from collaboration while eliminating privacy and compliance risks, more financial crime and compliance vendors would adopt federated machine learning models in 2023. Currently only a handful of FCC vendors are using federated machine learning in their solution.

In 2023, many vendors would be seen advocating and adopting explainable AI models to address changing fraud patterns, build trust in AI, increase transparency and governance, and improve decisioning. With federated machine learning and explainable AI models, further growth of AI/ML assisted fraud prevention solutions is expected in 2023.

With cybercrimes and frauds continuing to remain huge risk and fraud attacks growing in complexity, organizations should not only be aware of the upcoming fraud trends but also be technically equipped to fight against it while providing frictionless customer experience. Quadrant Knowledge Solutions advises organizations to continuously update their fraud and financial crime prevention solutions for improved detection, investigation and mitigation capabilities along with proper training of their fraud teams to stay competitive in 2023. Below are some of the recommendations from Quadrant Knowledge Solutions for technology vendors and end-users to ace in fighting frauds and financial crimes-

  • Realtime fraud checks at all touchpoints to prevent omni-channel fraud
  • Analyze consumer behavior to identify suspicious actions
  • Orchestrate all data points including customer data, risk signals and transactional data
  • Have robust KYC and high-performance transaction monitoring system
  • Consolidate fraud detection, identity verification and authentication solutions
  • Offer robust case management with customization and automation capability
  • Leverage advanced artificial intelligence, machine learning, data enrichment and fraud analytics for accurate response

Author

Divya Baranawal, Vice President of Research, Quadrant Knowledge Solutions.