Digital Boom, Fraudulent Doom? How RiskTech can secure the banking system

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In today’s digital age, where fingertips control financial transactions and algorithms shape banking interactions, the sector stands at a crossroad of remarkable transformation and hidden risks. Over the last decade, the banking industry evolved due to the widespread adoption of digital technology, providing customers with incredible access, efficiency, and convenience. Yet, amidst this whirlwind of progress, a significant challenge looms large – the alarming rise of banking frauds.

The statistics are alarming. According to the RBI’s annual report, 36,075 frauds were reported in banks during the financial year 2023-24 (FY24), a staggering increase of nearly 166 percent from the 13,564 cases reported in FY23. This surge illustrates the urgent need for banks to continuously invest in and update their risk management strategies to safeguard against the evolving scenario of digital frauds.

The Rise of Digitization and Its Impact on Banking Frauds

The emergence of digital channels such as online banking, mobile banking, and digital wallets has significantly expanded the attack surface for fraudsters. The convenience and speed of digital transactions have made it easier for fraudsters to execute their schemes swiftly. Digital payment categories, particularly card and internet transactions, have become the most common targets for frauds in terms of number. This trend highlights critical vulnerabilities in digital payment systems that urgently need addressing. The RBI Annual Report also highlights that Public Sector Banks consistently accounted for the highest total fraud amount. It further reveals that majority of frauds in terms of the number have occurred in the digital payments category (card/internet), while in terms of value, they have primarily been reported in the loan portfolio.

Moreover, the digital transformation has led to a transformation in the nature of banking frauds. Traditional frauds like cheque frauds and physical thefts have given way to sophisticated cybercrimes including phishing, identity theft, and data breaches. As banks digitize their operations, they must also strengthen their defenses against these modern threats.

The Need for Continuous Investment in RiskTech

The rapid evolution of digital frauds necessitates that banks adopt a proactive approach to risk management. It is no longer sufficient to rely on traditional methods of fraud detection and prevention. Banks must invest in advanced technologies and continuously update their risk management frameworks to stay ahead of fraudsters.

Banks should continuously monitor the transactions to detect suspicious activities. In addition, use of advanced analytics helps in identifying patterns indicative of fraud and help in mitigating such activities. Banks should adopt comprehensive risk assessment tools for detailed analysis of potential risks associated with transactions and customers.

RiskTech ensures the automation of onboarding, due diligence, and monitoring of collaterals, ensuring that they are properly monitored for any changes indicative of fraud. This can significantly help in addressing the challenges occurring with collateral-based loan frauds at banks and financial institutions.

The use of forensic intelligence and analysis based on multiple data sources can help in improving recovery from defaults and identification of undisclosed assets. RiskTech tools not only help in detecting frauds but also enable financial institutions to take informed decisions, thereby reducing the turnaround time and operational costs.

Adoption of Innovative Technologies and Proactive Measures

To create a secure and trustworthy environment for customers, banks need to employ innovative technologies and proactive measures. Blockchain technology, for instance, offers a promising solution for enhancing the security and transparency of financial transactions. By leveraging the decentralized and immutable nature of blockchain, banks can reduce the risk of fraud and ensure the integrity of their digital transactions.

Furthermore, banks must prioritize the security of their digital channels. This includes implementing enhanced encryption methods, multi-factor authentication, and secure coding practices. Regular security audits and vulnerability assessments are essential to identify and mitigate potential weaknesses in digital systems.

Additionally, banks should invest in educating their customers about the risks associated with digital banking and the best practices for staying safe online. Customer awareness campaigns can play a crucial role in preventing fraud by empowering customers to recognize and avoid potential scams.

Another vital aspect of risk management is collaboration. Banks should work closely with regulatory authorities, industry peers, and technology providers to share information and best practices. Collaborative efforts can lead to the development of more robust security standards and the early detection of emerging threats.

Conclusion The digital boom has undoubtedly transformed the banking sector, offering numerous benefits to customers and financial institutions alike. However, it has also brought about a significant increase in banking frauds, highlighting the need for effective risk management strategies. To secure the banking system in this digital age, banks must continuously invest in and update their risk management strategies. By staying ahead of the evolving threats, banks can ensure that the digital boom does not turn into a fraudulent doom.

By Vishal Sharma, Cofounder & CEO, AdvaRisk