3 ways to tackle transaction fraud today

By 7 minute read

Understanding transaction fraud and applying practical solutions is no easy task but needs to be done in every compliance department. 

Fraud is a wide-ranging financial crime that targets seemingly anyone. In the last two years, fraud cost customers and businesses over $42 billion according to PwC’s latest report. It’s a huge figure and unfortunately not much use to compliance officers when it comes to tackling the issue.  

After all, compliance teams cannot prevent customers from falling foul of phishing, spear-phishing, man-in-the-middle attacks, or social engineering attempts. But transaction fraud is where compliance officers can make a real difference.  

Reducing transaction fraud results in a better experience for customers and merchants and is one of the few areas where compliance can have a direct impact on financial institutions’ bottom line. 

What is transaction fraud? 

Transaction fraud is simple. If your business accepts or facilitates online payments, then this is a key risk vector for your company. The only thing criminals need are stolen credit card details to make purchases, by the time the true owner of the credit card has issued a chargeback and been made whole, the business has supplied the criminal with what they wanted - losing both product and money in the process.  

There are billions of potential savings to be had if this problem is effectively tackled in your business. And your business is only going to increase its exposure to transaction fraud over time. Instant payments and similar services mean that money transfers are occurring in real-time, your business is losing money to fraud in real-time.  

Ebook: How to set efficient AML transaction monitoring rules

Seeing an influx of chargebacks is one indicator that your business may need to invest in transaction fraud solutions. Especially as the merchant is usually the one that suffers the most. Customers are made whole by banks and banks charge merchants for the loss, but if this reaches unworkable levels for merchants then they will move to other banks and financial institutions to handle their payments.  

How can regtechs help fight transaction fraud? 

There are a few key ways that modern regtech solutions can protect financial institutions from the pain of transaction fraud. A huge portion of fraud is committed by internal actors, 37% of fraud globally is done this way, so relying on an Excel spreadsheet or other legacy system to monitor transactions only allows these criminals free reign to act inside your business.  

Regtech solutions make it difficult to tamper with transactions and leave an audit trail that shows exactly who did what regarding each transaction. But that isn’t the only way they can help with transaction fraud. 

1. Use the power of real-time transaction monitoring


Real-time payment processes result in a better experience for every entity in a transaction, so long as it’s a legitimate transaction. But this speed of payment is impossible for a human to respond to, resulting in either a batch-processing approach, which misses the fraud and only restores one party or a real-time responsiveness which requires automation, a core banking system, and intimate understanding of customer payment behaviors.  

Cashless transactions are growing. They make up a third of all transactions in the UK and non-cash payments in the eurozone in 2022 are valued at €197 trillion according to the European Central Bank. Targeting just a small percentage of that value reaps huge rewards for fraudsters. And many of these payments happen in real-time, using real-time transaction monitoring is the only way to tackle the scale of the issue. Identifying transaction fraud effectively without being able to monitor transactions in real-time is a nonstarter. 

If your transaction monitoring systems have real-time monitoring in place, they’ll be able to communicate with a core banking system using business rules. Allowing your AML program to react faster than human intervention and flag or hold transactions for manual review before the fraud completes.  

2. Automate everything where possible


Human error is a terrible thing. And unfortunately, not possible to eliminate completely. But by automating the data-heavy elements of compliance, it becomes far easier to work with usable data and perceive patterns of behavior.  

Manual data-entry slows down the speed of your compliance team and drains them of energy before they even open their first flagged transaction. Automation allows for that data to be presented to them immediately and with full trust in its accuracy.  

By bringing automation into the transaction fraud monitoring process, it also becomes simpler to collate and submit reports when suspicions are raised. Suspicious activity reports (SARs) require a full depth of knowledge to be usable for local Financial Investigation Units (FIUs).  

When compliance officers need to submit a SAR to the FIU, it becomes far simpler and faster to do so when automation has brought the information into one place. Often submissions are done using time-consuming forms that require data from multiple different locations. By using an automated process to bring this together in one place, a submission can be done in a few clicks. Rather than having to spend hours better spent on closing out more investigations, the information is automatically assembled into one report.  

It also prevents bad actors from making any sneaky changes to transactions or colluding with criminals outside of your organization. 

3. Understand the power of integrated data


Examining transactions effectively is no easy task. By unifying your KYC and CDD data with your flagged transactions it becomes far simpler to understand the context and purpose of a transaction. 

Being able to access a rich client profile with all the information of whoever initiated the transaction makes for easier investigations. Patterns can be detected more easily and allow for more efficient remediation of the issue.  

By taking advantage of KYC and CDD data that was provided to your business when customers first onboarded there is a significant reduction in time taken for investigations. It becomes immediately obvious whether the transaction fits the profile of the customer, and it also means your business is leveraging data it already owns to obtain greater insights.  

It’s one example of how breaking free of data silos can improve your compliance function and provide a better customer experience as well as preventing billions of dollars from being siphoned away by criminals.  

The future of transaction fraud

Transaction fraud is not disappearing any time soon, if anything trends suggest that it will only increase in scope. Finding effective ways to tackle the issue at pace is vital for any compliance function and necessary for any financial institution concerned with providing a stronger customer experience.  

Ebook: How to set efficient AML Transaction Monitoring Rules