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The State of Fraud and Financial Crime 2023

The State of Fraud and Financial Crime in North America

Volume, value and false positive benchmarks for financial institutions in North America, 2023.

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Key Findings Methodology The Scale of Fraud How to Fight Back Challenges & Solutions Strategies Lessons Learned Download Report
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Key Findings on Fraud and Financial Crime, 2023

  1. Increasing fraud rates: 70% of financial institutions (FIs) saw a rise in fraud rates over the past year, marking an 11% increase compared to the previous year.
  2. The most at risk payment methods: Credit cards, debit cards, and checks remain the most susceptible to fraud.
  3. Growing challenges for fraud managers: Both the frequency and complexity of fraud incidents have increased, posing greater challenges for fraud prevention professionals.
  4. Use of multiple fraud prevention systems reduces losses: Rule-based algorithms, fraud prevention APIs, and processor-provided fraud scores are among the prevalent methods used.
  5. Increased adoption of new solutions: FIs are more open to adopting new fraud prevention systems, with fewer requiring exhaustive proof before implementation.
  6. Embracing Generative AI: While currently underutilized, there’s widespread recognition (98%) of the need for Generative AI to combat fraud.
  7. Challenges with scams and authorized fraud: Detecting fraudulent activities, particularly scams and authorized forms of fraud, remains a significant challenge.
  8. Rise in physical forgery and counterfeit activity: Frauds related to physical forgery and counterfeit activity have doubled, constituting 14% of fraudulent transactions, likely tied to check payment fraud.
  9. Limited understanding of AI/ML delays adoption: about 70% of FIs are still learning about AI/ML solutions, causing delays in adoption of new technologies.
  10. Cost overtakes regulatory constraints: The cost of implementation has become the primary barrier to innovation and adoption, surpassing regulatory issues.

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“The fact that fraud is considered commonplace points to the real challenges in our sector. We need to build a future together where the fraudsters are two steps behind the FIs, instead of two steps ahead.”

Martina King, CEO, Featurespace

A note on methodology

The State of Fraud and Financial Crime in North America 2023 report is an updated version of a survey conducted in 2022 among FIs in the US market. This latest research involved 200 FIs, representing a diverse spectrum from fintech/neobanks to established global banking brands across North America.

The survey, like its predecessor, relied on telephone interviews with 200 individuals responsible for fraud and financial crime in the USA (90% of respondents) and Canada (10% of respondents).

Consistency was maintained by utilizing the Federal Reserve’s FraudClassifierSM model, enabling the categorizing of twelve distinct types of fraud and financial crime. This standardized approach ensured continuity with the previous survey, providing a comprehensive view of the evolving landscape of fraudulent activities in the North America financial sector.

A closer look at some of the key findings in the report

The State of Fraud and Financial Crime in North America – Fig1

The Scale of Fraud and Financial Crime

70% of FIs report an increase in fraud rates

In the year following our first survey, the incidence of fraud and financial crime reported by North American FIs has increased across all four crucial metrics we surveyed.

  1. Escalating Fraud Incidents: Fraud and financial crime incidents have surged across crucial metrics, with 70% of FIs reporting increased fraud rates.
  2. Severity and Compounding Challenges: The severity of fraud challenges has amplified, with almost no surveyed FIs reporting a decrease in fraud rates.
  3. Continued Losses Despite Reductions: FIs experiencing reduced fraud losses still incurred substantial monetary losses, amounting to nearly US$40 million collectively. Even among FIs that reported no change or a decrease in fraud rates, losses persisted, indicating ongoing challenges.

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The State of Fraud and Financial Crime in North America 2023 – Fig3 – white text

How FIs can fight back against fraud 

The right mix of fraud technologies is needed to deliver maximum impact 

In 2023, we asked financial institutions about a maximum of six measures, including rule-based algorithms, fraud scoring, AI/ML techniques, and external platforms. We found that FIs that reported lower losses from fraud had three or more measures in place, while those reporting increased fraud losses had fewer measures in place.

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The State of Fraud and Financial Crime in North America 2023 – Fig 9 – white text

Emerging technologies: the role of Generative AI

98% of respondents recognize a need for Generative AI as a solution for combating fraud and financial crime within their organizations. However, most of these professionals are still in the process of comprehending the technology itself or the regulatory aspects associated with it.

While exercising caution with new technologies is prudent, maintaining this stance may result in certain FIs falling behind and being outpaced by criminal activities.

Discover TallierLTM™

“Smarter technology helps financial institutions better understand their consumers. We have taken this to the next level with the recent announcement of TallierLTM™. This pairs cutting-edge generative AI algorithms with huge volumes of transaction data, enabling a machine to efficiently comprehend the relationships between different customer transactions.” 

David Sutton, Chief Innovation Officer, Featurespace

The State of Fraud and Financial Crime in North America – Table5 – nbg

Challenges, solutions, and attitudes to innovation

Perceived cost is now the greatest barrier to innovation

For the majority of respondents, overcoming challenges in the successful prevention of fraud and financial crime involves addressing two major obstacles: the costs associated with implementing innovations and ensuring the availability of technology. 

Regulatory requirements are no longer the most challenging

Regulatory requirements, which were the most challenging scenario in 2022, dropped to the sixth position in 2023. This suggests that the industry is placing greater emphasis on fraud, its associated losses, and the technical aspects of detection and prevention, rather than on money laundering and other financial crimes.

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“The rate at which fraudsters are accelerating can feel daunting, but that is why we need to be equally focused on acceleration: whether through information sharing, technological innovations, or fresh solutions within our existing systems.”

Duncan Sandys, CEO, P20

The State of Fraud and Financial Crime in North America 2023 – Fig13 – white text

Strategies for addressing evolving challenges 

In 2023, FIs have adopted a more proactive stance in response to the evolving landscape of fraud and financial crime. FIs are now willing to embrace and launch innovative solutions (from 10% in 2022 to 24% in 2023).

FIs that have encountered higher losses appear more inclined to take risks by positioning themselves as market leaders to confront their growing challenges.

Nonetheless, a sense of caution persists. 

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“The industrialization of fraud over the past decade means that financial institutions no longer have the luxury of being reactive when it comes to fraud mitigation. Organized crime rings are quickly adopting the latest technologies—everything from automation to deep fakes to GenAI—and are very effectively targeting financial institutions and their customers. Those FIs that take a wait-and-see approach to upgrading their fraud control frameworks will suffer higher fraud losses and impaired customer experiences.” 

Julie Conroy, Chief Insights Officer, Datos Insights

The State of Fraud and Financial Crime in North America 2023 – Fig 12 – white text

Implementing robust and proactive fraud prevention measures now yields the greatest advantages

  1. Implementation time: While the quantity of anti-fraud measures being taken is critical, the type of measures and the timing of their implementation are also essential.
  2. AI/ML to solve fraud related challenges: Among the group experiencing increases in fraud-related losses, over half were likely to consider using AI/ML (a 29% increase compared to 2022).
  3. Customer-centric approaches: FIs have enhanced their fraud prevention systems through the embracing of customer-centric communication and improved internal data.

FIs that have embraced flexibility, adaptability, and continuity have been able to mitigate fraud losses compared to those FIs that have delayed their decision to act.

FIs in Canada appear to adopt a more cautious approach to adopting new strategies 

The overall response from Canada suggests a greater level of caution; in fact, while a quarter of US FIs would be first-to-market with innovative solutions, just 5% of Canadian FI’s gave this response.  

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“The rising prevalence of fraud is a shared concern within the Canadian context. As one of the largest payments processors for Canadian FIs, our continued collaboration with Featurespace reflects our dedication to strengthening our capabilities against fraud and financial crime. It also demonstrates our commitment to the overall wellbeing of the financial institutions community we serve.”

Ron Kaine, Product Director, Enterprise Fraud Management, Central 1 Payment Solutions

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