Open banking is enabling greater financial transparency and innovation through open APIs and data sharing between banks, 3rd parties, and customers. It also opens up new fraud risks that need strong solutions. This article discusses the fraud challenges posed by open banking and how banks can tackle them through both prevention and detection strategies.
Fraud Detection and Prevention Solutions for Open Banking
Open banking introduces two key fraud risks – scams from bogus third-party apps and transaction fraud from account takeovers. Let’s examine solutions for each:
1. Risk Mitigation for Third-Party Apps
Banks can reduce the risks of scamming third-party providers (TPPs) using the following:
– Stringent TPP onboarding checks: verify developer identity and review app security protections.
– Granular permission controls: limit data access and transaction types based on app risk.
– Robust app vetting process: multi-factor evaluation on security, privacy, and ethics.
– Monitoring third-party app reviews: to identify any emerging fraudulent behavior.
– Ongoing audits of approved TPPs: ensure apps remain compliant and not compromised.
– Fast deauthorization for identified rogue TPPs: immediately block violators.
– Maintaining an approved TPP marketplace: so customers connect only with trusted apps.
2. Transaction Fraud Prevention & Account Takeover
Mitigating account takeover and fraudulent transactions strategies include:
– Step-up user authentication: multi-factor authentication for high-risk transactions.
– Behavioral analytics: identify out-of-pattern account activity to block suspicious transactions.
– Transaction risk scoring: real-time intelligence to flag high-risk transactions.
– Smart PIN management: prevent recycling old PINs during resets.
– Blocking sim-swap fraud: multi-channel onboarding verification.
– Robust login security: biometrics, device binding, IP tracking to confirm user identity.
Alongside solutions to manage the risk from TPPs and fraudulent transactions, banks need enhanced detection capabilities when payment fraud does occur.
Fraud Detection Solutions
Robust fraud detection enables identifying fraudulent activity that slips through preventive systems. Key capabilities include:
– Payment transaction monitoring: AI and machine learning to detect anomalies in transaction behavior.
– Network pattern analytics: identify organized fraud rings based on inter-related financial activity.
– Cross-channel alert correlation: connecting related anomalies identified across channels.
– Integrated case management: tools for fraud investigation teams to seamlessly manage cases.
– Comprehensive reporting: visual dashboards with fraud KPIs and root cause insights.
– Predictive analytics: identifying users at high risk of account takeover based on data patterns.
– Automated enrichment from external sources: linking internal financial data with watchlists, geo-locations, and more.
Implementing end-to-end fraud management capabilities is critical for banks. This robust system acts as a shield against emerging threats, safeguarding both institutions and their customers from the ever-evolving realm of online payment fraud.
Enabling Capabilities for Fraud Management
Building effective fraud solutions requires investing in key enabling capabilities:
1. Consolidated data layer:
– Single customer view across products and channels.
– Centralized data lake for easy enrichment and analysis.
2. Agile analytics engine:
– AI and machine learning for predictive insights.
– Real-time analytics at scale.
– Custom rules and scenario modeling.
3. Flexible decision:
– Real-time approvals with context-based step-up authentication.
– Risk scoring transaction requests.
– Dynamic channel, customer, and geo-specific rules.
4. Automation and orchestration:
– Straight-through processing where possible.
– Orchestrating third-party transactions.
– Automated data enrichment and reporting.
These pillars enable the building of a robust, intelligent, and scalable fraud management program – imperative for the open banking era.
Emerging Technologies
Emerging technologies can enhance fraud management capabilities for open banking:
– Advanced biometrics like face, voice, and palm-print recognition offer stronger customer authentication to block fraudulent logins.
– Natural language processing and sentiment analysis on customer conversations can detect social engineering fraud patterns.
– Graph analytics better map connections between entities to uncover organized fraud rings spanning apps, accounts and devices.
– Cloud-based solutions provide the scalability to monitor huge transaction volumes from open banking in real-time.
– Robotic process automation assists fraud analysts by automating repetitive administrative tasks involved in the investigation.
– APIs and microservices make it easier to connect with external data sources for enriched insights rapidly.
By leveraging such technologies, open banking solutions can stay ahead of the sophisticated tactics used by fraudsters in an open banking world.
Fraud-as-a-Service Offerings
Many banks are also considering third-party fraud-as-a-service offerings to benefit from specialized capabilities quickly:
– Fraud detection and prevention delivered on-demand through cloud models.
– Continually updated global fraud intelligence aggregated across clients.
– Usage-based pricing that optimizes costs for transactional volumes.
– Industry-specific fraud models refined through larger datasets.
However, banks need to ensure sufficient control and configurability with third-party solutions. API-based integration allows combining external capabilities with internal data, rules, and workflows in a cohesive manner.
Ongoing Vigilance
While robust fraud protection is vital before leaping into open banking initiatives, the work doesn’t end there. Banks need ongoing vigilance through:
– Monitoring fraud trends and attack patterns globally and adjusting models accordingly.
– Providing adequate controls directly in customer channels like mobile apps for transaction verification, biometrics, etc.
– Training call center staff on new scam tactics related to open banking APIs and apps.
– Regular red teaming exercises to proactively identify and plug vulnerabilities.
– Updating systems to support new open banking use cases like transaction initiation requests securely.
– Cross-industry information sharing on common fraud threats without compromising competitive advantage.
Proactive fraud management balanced with customer experience is essential for banks on the open banking journey.
Conclusion
Open banking delivers immense opportunities but also introduces new fraud risks that banks need to mitigate. A combination of solid prevention and detection controls is required. Investing in consolidated data, analytics, decisions, and automation capabilities provides the foundation. This allows banks to securely unlock open banking benefits while providing account holders robust protection against fraud. With ongoing vigilance and increasing maturity of fraud programs, the industry can reap open banking rewards.
