Criminals are constantly identifying new ways of convincing innocent people to be unwitting participants in crimes, and unfortunately, the number of victims and the size of the losses continue to increase.
In 2022, the Federal Trade Commission highlighted that consumers in the US lost nearly $8.8 billion to fraud, an increase of more than 30% over the previous year. In the UK, over £1.2 billion was stolen by criminals last year, equivalent to over £2,300 every minute.
Data exchange between the public and private sectors is critical in the battle to stifle organised criminals from committing fraud. However, data sharing is loaded with difficulties in particular privacy laws and consumer protection, which can slow down attempts to stop crime as it is being committed.
The rise of cutting-edge technologies such as AI has also diversified the toolkit of modern cyber-criminals, who are now using techniques such as AI voice cloning tools to dupe victims. This has made it even more difficult for the industry to stop.
To combat increasingly sophisticated fraud, modern solutions and technologies must be adopted by the payments industry to enable effective data-sharing between the public and private sectors to reduce crime.
Regulatory Capture. When regulators look the other way at the fraud in our financial markets
— kristen shaughnessy (@kshaughnessy2) November 10, 2023
“…The lawyers at the SEC are not paid well..what they’re looking for is a trophy.
From the SEC they’re looking for something that they can put on Linked In.
From that they can get… https://t.co/vm4Hv4CIs8
Why Data Sharing Is Critical
Public and private institutions have access to critical data sets that can help identify fraudulent behaviour and bad actors. Through collaboration, each can build a fuller, more informed picture of potentially suspicious behaviour.
Traditionally, transactional data has been used by institutions to identify fraud as it contains information about parties, dates, amounts and locations. More modern fraud identification models have developed which provide more in-depth customer analysis on preferences and purchase history.
By improving the flow of this information between public and private sectors, institutions can utilise what is already known about a customer to help determine whether certain abnormal behaviour is potentially fraudulent.
Unfortunately, key data sets are often siloed within complex systems that require callouts to third parties. As a result, external institutions are often unable to reap the benefits that derive from accessing key information around transactional history and customer information.
Stringent GDPR laws are rightfully put in place to uphold an individual’s fundamental right to privacy and protect sensitive consumer data. However, privacy laws can impede efforts to combat fraud as soon as it is happening.
New Technological Solutions
Thankfully, advancements and the adoption of new privacy-enhancing technologies (PETs) and artificial intelligence (AI) are not only helping to resolve regulatory concerns of meeting privacy laws by protecting the consumer’s data but are providing a defensive armoury against modern cybercriminals.
PETs allow institutions to collaborate without using personalised data through a variety of tools that ensure anonymisation and end-to-end encryption. This allows institutions to share datasets while ensuring that all personalised consumer data is protected, and private, meaning laws such as GDPR are still adhered to.
AI can be used to detect patterns and provide real-time data around transactions that can help institutions quickly identify anomalous behaviour.
The technology has advanced to where it can create an “unsupervised model” which helps institutions to determine fraudulent behaviour by analysing activity that isn’t directly known to be fraudulent but that acts differently from its peers.
These technologies are readily available and already play an important role in timely fraud prevention and detection through analysing large data sets quickly and effectively. However, there is a common entry barrier due to its complexity and price. Hence further education and support are needed to help with wider industry adoption.
The Government should act and introduce an ‘AI investment scheme’. This could allow partners to incorporate these cutting-edge technologies to mitigate fraud risk, ultimately protecting customers and benefiting the entire payments ecosystem.
another amazing episode!
— This Week in Startups (@twistartups) September 6, 2023
this time w/@sardine ceo @soupsranjan
financial fraud and hacking are much scarier in the age of generative ai.
as much as gen ai empowers good actors, it does the same for bad actors.
so, soups is building a platform to counter and prevent them!
he… pic.twitter.com/h0ccckywRe
New Protocols Required
New technologies must be underpinned by mutual trust between partners, and this can be achieved with new protocols that facilitate safe, effective data sharing between private and public sectors.
Some existing protocols to stop fraud have proved to be successful. The current UK banking procedures around freezing suspicious payments, prevented £55 million in fraudulent transactions last year.
However, FIs, government agencies, law enforcement, tech companies and telcos need to do more to create a framework to help identify suspected fraud across the payments industry.
Further insight on how to share data responsibly is paramount to successful data collaboration. Increased engagement between sectors and organizations on controlled data sharing could help with the detection of sophisticated fraud which one organization can't see alone.
To ensure a comprehensive protocol is introduced, the industry must work to develop and agree on a framework or platform that serves to share key data collaboratively, protect consumer privacy, and ultimately reduce fraud.
The Next Steps – Fighting Fraud through Data Collaboration
Current efforts to educate consumers about fraud detection and reporting are insufficient. As modern scam tactics become sleeker and more sophisticated, so too must the prevention methods. Fraudulent methods are diversifying, and consumers must be taught how to spot and report anomalous activity more efficiently.
As mentioned, the government holds a crucial role in the introduction of numerous initiatives including:
- Regulatory guidance on responsible data sharing between entities and on standard data formats.
- Allow private sector access for the authentication of government data.
- The creation of a regulator-led forum to facilitate regular dialogue with the private sector on combating fraud to foster mutual understanding and build trust.
- Work with industry to develop a fraud prevention protocol setting out circumstances when it is acceptable to override privacy law provisions.
While we still need to see more prosecutions to deter criminals from committing and recommitting fraud, the industry should also have a ‘For Your Eyes-Only’ access to law enforcement Suspicious Activity Reports, to help the public be notified of criminals and the new techniques they are using for their activities.
These initiatives alongside modern technologies in PETs and AI can allow organisations to build stronger forms of defence, enhance data sharing, and keep fraudsters at bay. This will not only help protect consumers from the deep financial and emotional impact of being a victim of fraud but also improve the safety of all within the payments industry.
