Fraud has become such a problem that many countries have declared the issue a national threat

Fraud isn’t anything new, however. People have been scamming others out of money for millennia. But recent innovations in digital banking, payments and online commerce have opened a Pandora’s Box of opportunities for financial criminals. 

Fraud is often organized crime, too. The scale and scope of fraud today indicates significant involvement from criminal enterprises, which can run multiple concurrent scams.  

Fraud detection and fraud identification are therefore crucial capabilities for business. As we will see, fraud is too prevalent and too costly for any business to ignore. 

What is fraud detection? 

Fraud detection is all of the processes, tools and capabilities a business has to identify and prevent unauthorized financial activity. Such illicit financial activity can include unauthorized credit card payments, push payment scams and identity theft. 

Any business should invest in a fraud detection system because every business is susceptible to an attack.  

Which institutions are most at risk of fraud? 

Though any business is vulnerable, certain institutions are bigger targets for financial fraud. Those include: 

  • Banks 
  • Credit card companies 
  • Businesses with a high volume of online transactions (e.g. a major retailer) 

The higher the transaction amounts and the higher the volume of transactions, the higher the fraud risk is for the business. This is why bank fraud detection and credit card fraud detection are so important for those types of businesses. 

Why is fraud detection imperative to your business?  

Fraud losses are much more expensive than fraud prevention. 

According to KPMG’s 2022 Fraud Outlook report, more than 70 percent of businesses in the Americas reported an instance of fraud within the last 12 months. On average, about 0.7 percent of those companies’ net profits were lost to fraudulent activity. This figure does not include the reputational damage those businesses suffer, which drives that cost even higher. 

Fraud detection is a crucial line of defense in protecting against these kinds of breaches and these kinds of losses. 

Creating a fraud detection system 

Fraud detection systems monitor transactions and user behaviors in real time for instances of illegitimate or unauthorized activity, or improper access to sensitive data. The system flags such events for manual review.  

If you have ever had a bank card blocked, you have seen a fraud detection system in action. A blocked card means your bank’s fraud system spotted suspicious activity and suspended your ability to transact with that card until its investigators could discern whether the activity was fraudulent or legitimate. 

There are all kinds of techniques and strategies for detecting fraud. Those include: 

  • Using artificial intelligence to mine data and recognize patterns in transactions. 
  • Using machine learning to understand user behaviors and develop models for what constitutes genuine activity and what constitutes suspicious behavior. 
  • Using statistical techniques such as regression analysis and probability distributions to figure out when, where and how instances of fraud are most likely to occur. 

Featurespace deploys a combination of machine learning and artificial intelligence to protect customers, banks and financial institutions. Those tools allow our customers to track patterns within genuine transactions — thousands and millions of transactions at a time — so that anomalous behaviors become apparent.  

Those tools can also be incredibly complex, which is why the idea of model explainability has emerged to help people understand and talk about what’s going on inside a fraud detection tool. 

Financial fraud detection 

Financial fraud detection is what banks and financial institutions rely on to identify suspicious transactions, anomalous user behaviors and breaches of sensitive financial data. Financial institutions typically have a legal responsibility to detect fraud. 

In the European Union, for example, the Revised Payment Services Directive (PSD2) helps define what payment service providers must do to facilitate cross-border payments in Europe while securing the accounts and the transactions of customers. 

Banks and financial institutions also have customer experience concerns to balance against the need for security. False positives, or events incorrectly misidentified in the system as instances of fraud, can be incredibly frustrating for a banking customer. That’s why banks scrutinize finance fraud detection systems heavily; they need transaction monitoring tools that can spot real instances of fraud while reducing the number of false positives. 

Protect your business with our fraud detection software 

Featurespace’s machine learning models and Adaptive Behavioral Analytics are built to help businesses recognize and prevent fraud. 

Featurespace’s ARIC™ Risk Hub monitors real-time customer data for suspicious activity and helps fraud investigation teams prioritize alerts with explainable anomaly detection. It can tell analysts the activities it finds suspicious, why so and which activities they should focus their energies on first. 

To learn more, have a look at our financial crime and fraud solutions to see which is the best fit for your business.