● Two-thirds of Financial Institutions report an increase in volume and dollar cost of fraudulent transactions
● Fraud on the rise across all payments types, with credit cards most commonly targeted
● Scams make up a quarter of fraudulent transactions, with average losses of over $100M last year across the surveyed financial institutions
● More than half (58%) of executives worry that no solution can match sophistication of attacks

ATLANTA, September 13, 2022 – Today, Featurespace, the leading provider of enterprise financial crime prevention software, announced the release of a new report, “The State of Fraud and Financial Crime in the U.S.” conducted in conjunction with PYMNTS.com. The report paints a picture of a sector trapped between increasing financial crime – especially scams – and the perception that any solution will bring added complexity and compliance headaches.

Scams soaring in the States
Authorized Party fraud, to include scams, is a rapidly growing and seemingly pervasive threat to the financial services industry, representing over half (52%) of total fraud volumes. Within the Authorized Party category of the FraudClassifierSM from The Federal Reserve, the research found that scams (known as ‘authorized party was manipulated’) represent 22% of the volume and 19% of the total value of fraudulent transactions.

Relationship and trust scams, such as romance and scams that prey on vulnerable people, made up 13% by volume, and 12% by value. Products and services scams, where a product or service is not delivered or never existed, made up 9% by volume, and 7% by value.

The research overthrows the perception that scams are limited to real-time payments and P2P apps. Scams occur across all payment types, including cards, contributing to the major rise in credit and debit card fraud volumes and losses.

An uneven playing field
While 62% of all financial institutions reported an increase in the volume of fraudulent transactions, smaller banks and institutions (those with between $5 billion and $25 billion in assets including credit unions) were hardest hit. Often less equipped to counter or sustain increasingly sophisticated attacks, almost three quarters (71%) of smaller FIs reported increased fraud rates.

68% of smaller institutions reported an increase in the dollar cost of fraudulent transactions (versus 48% of larger FIs, those with more than $500bn in assets) and a 48% increase in the overall false positive rate (versus 39% for those larger FIs).

Smaller FIs also sustained the highest rates of credit card fraud with 66% reporting suffering attacks, and 61% experiencing prepaid or debit card fraud. Rapid payment and peer-to-peer fraud also increased most across smaller organizations.

Carolyn Homberger, President of the Americas for Featurespace, said: “FIs of all sizes are experiencing a significant rise in the total cost of fraud, this is not new. However, the fact that fraudsters are increasingly targeting smaller institutions in greater numbers should give all of us in the industry pause. This begs a question: is criminal activity opening up a gap between the largest and smallest FIs, threatening the resilience and sustainability of the system and ultimately reducing consumer choice?”

“The answer should be no. With the growth of Banking as a Service providers and processing partners, smaller FIs can today access best in class, machine learning, fraud and financial crime prevention technologies”.

Countermeasures mired in complexity or compliance fears
Two out three executives viewed the adoption of innovative solutions to improve fraud detection and AML compliance as a high priority, while that number rose to 95% among anti-money laundering executives. Yet 39% questioned cited concerns about the perceived complexity of integrating new technologies into their organizations.

Bleaker still, more than half (58%) of all respondents reported thinking that modern fraud schemes are just too sophisticated for any solution to be truly effective, while 49% worry that any system would eventually be overwhelmed by the rising tide of attacks. Two-thirds (66%) admitted that “complex regulatory requirements” were holding them back from trying new technology options to counter crime. Moreover, 59% of executives said they were adopting a ‘wait and see’ approach until newer technologies are ‘widely accepted’ or ‘well-developed’ before considering them as alternatives to older, outdated mitigation options. Those who launched innovative solutions before others saw the lowest fraud rates, while ‘fast followers’ saw significantly lower fraud rates.

Homberger elaborated: “This research points to an industry in a kind of deadlock when it comes to combating fraud and financial crime. The data – alongside our own experience – shows there’s an appetite for more innovative solutions able to address the ever-increasing challenges posed, yet it appears some institutions continue to wait before taking the leap and benefiting from the significantly reduced fraud losses promised to smart thinking, first movers. It’s a paradox that benefits no-one as much as the criminal, and impacts no-one as much as the consumer who see their confidence, trust and choice diminished further with every attack.”

Dave Excell, Featurespace’s Founder, said: “This report raises some important questions around how fraud and financial crime is measured and reported across the US, and makes us ask why some executives feel restricted in implementing effective countermeasures.

“We recognize the report is the first of its kind and the data is limited; however, what’s clear is that traditional approaches to curbing fraud and financial crime are no longer enough to stem the tide. Fears of compliance or technology complexity appear to be holding institutions back from employing more effective machine learning, fraud detection platforms that are simple, battle tested, and better equipped to minimize institutional losses.

“Our hope is that this report opens up an industry wide conversation, and future iterations will build a deeper understanding of the challenges we face, and what we must do collectively to outsmart the criminal. The one thing we can’t do is nothing.”

Peter Radcliffe, President of P20, the voice of the global payments industry, welcomed the report saying: “This is a very valuable report, a real stake in the ground. It’s a first benchmark indexing of fraud and financial crime in the US. What’s important now, is to understand more of the issues behind the headlines – for instance, the reasons cited for not taking action. We look forward to working together as an industry to tackle the issues raised.”

Notes to readers
Featurespace’s report polled 200 executives working at financial institutions with at least $5 billion in assets to gather a holistic view of key fraud trends and financial crime prevention measures that exist today. Given that there is no single, authoritative source of data, the report serves to fill the gap, and provide the industry with a baseline for benchmarking and decision making. Ultimately, the purpose of this work is to start a conversation that promotes debate, discussion and knowledge sharing across the sector.