May 4, 2022
It's been a little more than a century since Charles Ponzi executed a fraud scheme so infamous that it's been known since by his name.
This notorious fraudster convinced people to invest millions in his scheme. They were promised 50% interest after a mere 45 days — none of which they ever saw, of course. However, even after Ponzi went to prison for his crimes, many of his victims still refused to believe they'd been conned.
Confidence schemes (cons) are all about trust, where the swindler first wins the confidence of a victim before defrauding them.
Though con artists remain a part of our modern world, this century has brought out a new type of swindler — one who thrives in the shadows of a digital-first environment exacerbated by the pandemic, who has mastered the art of concealing or creating identities online to establish trust and who will take advantage of businesses offering seamless customer experiences and financial access to those in need.
This swindler is pervasive. Already, synthetic identity fraud losses have grown from $6 billion in 2016 to $20 billion in 2020. Our data shows that documents submitted via an online channel that contain fraudulent information have increased from 5% in 2021 to 10% in 2022.
For financial institutions, the path to fighting back is not simple. Merely tightening current fraud prevention strategies runs the risk of cutting off access for legitimate consumers, while increasing the barrier to entry leaves out millions who are considered "thin file."
To successfully navigate this new landscape, financial services companies must reexamine how we determine who is trustworthy and who isn't.
Why Fighting Fraud Means Rethinking Trust
One of the biggest challenges my brother and I faced when we came to the U.S. from Ireland was getting access to finances. We had documentation (work permits, visas, proof of residence and even Social Security numbers), but we weren't American citizens and didn't have any credit history. Getting access to a bank account, a credit card or any other type of finances was still nearly impossible.
We wanted to understand why. What was happening behind the scenes at these financial institutions that made it so difficult for two legitimate customers to get approved?
We found that large risk and operations teams rely heavily on a combination of legacy technology and manual reviews for approving, onboarding and underwriting customers. They collect and analyze a variety of information to determine eligibility and whether a potential customer can be trusted.
However, is this approach actually working? While we were rejected, some large enterprises are discovering they've approved millions of customer accounts that turned out to be illegitimate, and some are calling the $80 billion in fraudulent PPP loans distributed the "biggest fraud of a generation."
Traditional methods worked when companies operated out of a single location, scaled at a steady pace and did business with customers from their community (typically in person). However, the pandemic has accelerated digital transformation and exposed new vulnerabilities for criminals to exploit. The finance industry must evolve its approach to managing risk and detecting fraud because restricting access to those with little or no credit history is not the answer.
Businesses need new technology, frameworks and internal defenses to effectively fight the fraudsters of today. We all must rethink how we determine a customer's trustworthiness, especially so that we aren't preventing authentic customers from obtaining finances.
Here are a few ways to help you get started.
Encourage a culture of fraud prevention.
Many organizations shy away from talking about fraud due to embarrassment or fear of blame. However, risk and operations teams must be able to communicate about it, learn from it and better defend against it.
Start by creating a simple way to share information like a "suspected fraud" Slack channel, where any team member can go to ask their colleagues about something that looks suspicious. This creates a safe and helpful space for someone to go to if they have a concern about an applicant.
When a fraudulent application does make it through your system, you can also run postmortems to understand what went wrong. The goal is not to place blame on anyone but rather focus on figuring out how to improve.
Embrace and layer new technology.
Many are readily adopting AI tools, which have proved to outperform humans and increase the efficiency of document fraud detection. However, advancements in modern fraud prevention technology go beyond detecting forged documents.
IP forensics, fake email identification, real-time payments, business verification, tax information and so many other processes can be automated and enhanced. However, no single tool will be a silver bullet. It's imperative for financial institutions to layer different software solutions across all of their touchpoints (account opening, payments, transactions, etc.) to best defend against different types of fraud.
Evaluate different datasets to understand applicants. In addition to the 62 million Americans considered "thin file" customers, another 26 million are "credit invisible" due to a lack of any credit history. These communities are often barred from accessing financial products and services.
There is a better way. Financial institutions can look at larger sets of data to understand the potential risk of granting their applicants a line of credit.
Debt-to-income ratios, overdraft events, monthly spending habits and other transaction analyses can provide supplemental information about a potential customer outside of just a credit score. This can create a more holistic assessment of risk and ensure that applicants from those underserved communities aren't automatically rejected.
Fair And Efficient Finance Is The Future
Fintechs and financial institutions alike will continue to do business online at a massive scale and with a diverse, global customer base. That means they must prioritize ways of determining customer trustworthiness that both keep fraudsters out and let legitimate, deserving customers in.
It's time to create a fair and efficient financial services ecosystem. By taking equity into account, we can all work to make this mission a reality.