How Banks Can Adapt to the Rising Threat of Financial Crime

COMMENTARY

Banking executives have a lot to consider when it comes to financial crime. With new technologies at their disposal, fraudsters are becoming more sophisticated, underscoring the importance of staying vigilant in protecting against these emerging threats. In the near future, synthetic identity fraud and account takeovers will increasingly be leveraged to maximize gains, and AI and machine learning will rapidly adapt to a bank’s detection methods. While most banks recognize the importance of fraud prevention, having a clear strategy and best practices is essential to mitigate the rising risks posed by these evolving technologies.

Risk of Fraud and Financial Crimes Grows

Last year, US fraud losses totaled a staggering $12.3 billion, and the emergence of new technologies will amplify financial crimes further. Research from Deloitte expects US fraud losses to grow to $40 billion by 2027, representing a compound annual growth rate (CAGR) of 32%. Generative AI is one reason why bank fraud is growing. At Grasshopper, we’ve seen fraudsters try to use generative AI (GenAI) to create fake business profiles and descriptions when applying for small business loans. To combat this, banks need to implement advanced AI-driven fraud monitoring and detection tools, enhance identity verification processes, and stay vigilant with continuous monitoring and staff training to recognize anomalies.

The rise of banking-as-a-service (BaaS) and embedded banking has also created more opportunities for bad actors to try to exploit gaps in fraud prevention. In this model, banks lose the direct connection with the end user, adding complexity to fraud prevention efforts. BaaS and embedded finance solutions offer significant advantages for modern banking, but they also present new challenges in fraud prevention. PYMNTS.com reports that bad actors are targeting application programming interfaces (APIs) — serving as the bridge between banks and their BaaS partners — are being viewed by bad actors as entry points. Earlier this year, attacks on APIs were up 20% year over year. Although the benefits of BaaS far outweigh the risks, fraud activity continues to accelerate. To stay protected, banks and their BaaS partners need a systemic approach to manage risk tolerance across the platform and protect themselves and their clients. 

Implementing Best Practices for a Strong BaaS Partnership 

Banks and BaaS partners who collaborate closely to continuously improve their risk programs can navigate the evolving risks and rewards of AI. The most successful way to be effective and successful in preventing fraud is to have a shared understanding of the risk appetite and compliance program. Sometimes, this will mean the bank has to say no to a potential BaaS partnership, if the partner doesn’t align with the bank’s risk culture. This can be as simple as one partner shifting focus to a specific industry that the other is not as committed to serving. If one partner is choosing to pivot in a specific direction and the other is not, the partnership is no longer aligned. A shared understanding should be established at the onset of the relationship, but partners should also routinely check in to ensure they remain aligned, as risk appetite is always evolving alongside growth.

The partnership should also clearly identify roles and responsibilities to create clarity and transparency in the fraud prevention strategy. The professionals engaged in the relationship should know how responsibilities are allocated to create a solid foundation of the risk framework. From there, teams should share resources through joint training programs and guides for new regulation or threat activity. Ultimately, a robust program doesn’t just identify gaps — it actively closes them. Through regular audits and swift, actionable responses, it ensures vulnerabilities are eliminated, keeping fraud prevention strong and resilient. By embracing these strategies, banks can confidently drive the innovation economy forward, unlocking the full potential of BaaS partnerships while safeguarding against financial crime.

The Human Response Is Essential

Technology is a critical component of a successful fraud prevention program, but it can’t stand alone. The fact is, humans have an innate ability to detect when something doesn’t feel right — robotic behavior, no matter how sophisticated, still raises red flags for human analysts. Outliers that slip past automated systems are often identified by skilled anti-fraud professionals who can spot the subtle signs that machines miss. 

Banking fraud and financial crimes are growing more sophisticated every day, and the banking industry continues to evolve by forging relationships with new partners. While these partnerships can introduce new fraud risks, banks don’t have to be vulnerable. By understanding the threats, building strong collaborations, and investing in advanced detection tools, banks can stay one step ahead and protect themselves and their clients.