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The threat of financial crime grows in tandem with the changing financial world. Open banking offers enormous possibilities for service and customer experience innovation. Since it is characterised by the sharing of financial data between institutions via APIs. However, this increased connectivity also raises the stakes for fraud and financial misconduct.
The December 2024 Financial Crime Report provides insight into the changing picture of financial crime with regard to open banking. This blog looks into the report’s core findings, recommendations, and techniques that financial institutions can use to combat financial crime within the open banking context.
Understanding the Financial Crime Landscape in Open Banking
The report presents alarming statistics. For example, in the first half of 2024, authorised push payment (APP) fraud losses amounted to £213.7 million, impacting 178,230 payments. This figure highlights the significant scale of financial crime that FIs are facing and sets a sobering context for the need for robust defenses.
Types of Financial Crime in Open Banking
The report lists a number of common financial crimes associated with open banking, including:
- Account Takeovers: Cybercriminals obtain unauthorised access to client accounts, often via intricate phishing methods or credential stuffing.
- Application Fraud: Using stolen identities or fabricated data, scammers create phoney accounts.
- Data Breach: API vulnerabilities enable potential exploitation, resulting in unauthorised access and theft of consumer data.
- Payment Initiation Fraud: Exploiting open banking APIs to initiate fraudulent transactions, often through compromised TPPs (Third-Party Providers).
- Synthetic Identity Fraud: Using a combination of real and fake information to create identities for fraudulent financial activities.
- Man-in-the-Middle (MITM) Attacks: Intercepting data between users and TPPs to alter payment details or steal credentials.
- Consent Phishing: Tricking users into granting API access to fraudulent TPPs to siphon funds or harvest data.
- Account Aggregation Exploits: Abusing access to multiple linked accounts to move funds rapidly and obscure money trails.
These types of financial crimes demand a strategic approach to risk management and fraud prevention.
Open Banking-Specific Challenges:
- API Security Gaps: Vulnerabilities in open banking APIs that hackers exploit to access accounts or conduct fraudulent transactions.
- Third-Party Risk: Unvetted or poorly secured TPPs increasing exposure to data breaches or fraud.
- Data Privacy Violations: Mishandling or unauthorised sharing of consumer financial data by TPPs.
How Financial Institutions Should Prepare
To tackle open banking fraud more successfully, numerous critical features and tactics can be improved or implemented. While many financial institutions are improving their anti-fraud systems, the dynamic and evolving nature of fraud necessitates a comprehensive and proactive approach. Listed below are numerous crucial areas that require additional attention and development:
Improved Data Sharing and Collaboration
- Enhanced Collaboration: Banks, FinTech’s, and Authorities should collaborate more effectively. Collaborative systems enable institutions to share information about established fraud patterns, suspicious activity, and emerging threats, allowing them to respond more quickly and efficiently.
- Shared Fraud Databases: Establishing centralised or shared databases for reporting and accessing information on fraud incidences might help identify trends and criminals operating across multiple institutions.
Advanced Technology Utilisation
- Artificial Intelligence and Machine Learning: Financial institutions should invest more in AI and machine learning technology that can analyse enormous datasets in real time, hence enhancing anomalous behaviour detection. These technology can help predict and prevent fraud before it happens.
- Behavioural Analytics: More complex systems that focus on behavioural analytics can improve anomaly detection by learning user patterns over time, providing transaction context, and recognising deviations.
Improved Customer Account Security
- Layered Authentication: Standardising multi-factor authentication can greatly minimise the risk of unauthorised account access. Along with typical password techniques, this includes biometrics (fingerprint or facial recognition) and hardware tokens.
- User Education on Security Practices: Organisations should give their clients regular training on how to protect sensitive data, identify phishing scams, and secure their accounts.
Regulatory Enhancements and Standards
- Stronger Regulatory Frameworks: Regulatory agencies must constantly respond to technological changes and evolving fraud schemes by changing legislation and guidelines. This includes understanding the legal implications of digital currencies and ensuring compliance with Anti-Money Laundering and Know Your Customer requirements. Clear guidelines for security requirements across the open banking ecosystem promote uniformity and compliance.
- Mandatory Reporting: Creating clearer procedures for reporting suspected fraud instances and breaches can help organisations combat fraud more quickly.
Consumer Awareness and Education
- Campaigns for Public Awareness: Financial institutions need to launch extensive public awareness initiatives that educate customers about the risks, how to spot fraudulent actions, and how to promptly report any inappropriate behaviour.
- Transparency in Practices: Trust can be developed by being open and honest about the usage of customer data. Providing information about existing security measures can help consumers feel more safe.
Intelligent Incident Response Mechanisms
- Proactive Incident Response Plans: Financial institutions should create and update thorough incident response plans on a regular basis. These plans should include particular procedures for dealing with fraud, as well as client communication techniques.
- Post-incidence Reviews and Analysis: Following a fraud incidence, doing detailed retrospective evaluation can assist identify flaws, allowing organisations to improve their future defences.
Focus on User Experience and Trust
- Usability vs. Security: Achieving a balance between user-friendly experiences and strict security measures is critical. Tools that improve security without causing inconvenience for legitimate users can serve to foster trust and encourage the usage of open banking services.
Holistic Risk Management Approaches
Comprehensive Risk Assessment
Regular assessments should consider both technological and human aspects. Understanding the risks offered by insiders, social engineering, and third-party services is equally important.
A structured framework for fraud prevention includes the following key components:
1. Risk Assessment
Regularly assessing vulnerabilities in open banking services helps FIs identify and understand their risk exposure, guiding the implementation of suitable mitigation strategies.
2. Monitoring and Detection
Employing advanced analytics tools can facilitate continuous transaction monitoring. Implementing automated alerts helps detect suspicious activity early, allowing for timely investigations.
3. Response and Mitigation
- Establishing protocols for rapid response to detect fraud attempts is essential.
- Effective interaction with affected clients raises the institution’s perceived dependability.
- Communication with regulatory organisations enables both compliance and openness.
4. Continuous improvement
To adjust to new threats and advancements in financial crime, fraud prevention techniques must be reviewed and updated on a regular basis.
Thus, fraud prevention should be a strategic goal that extends throughout all elements of business, from product creation to customer service.
To Wrap Up
The Financial Crime Report serves as a timely warning of the potential hazards existing in the rapidly expanding open financial landscape. It emphasises that financial institutions must take proactive steps to protect themselves and their customers against financial crime. FIs can shield themselves from financial crime while simultaneously ensuring the integrity of the open banking system by using technology, cultivating a compliance culture, educating customers, and adopting effective fraud prevention frameworks.
Although the continuous difficulties that financial institutions encounter are emphasised in this study, it also illustrates how innovation and cooperation can lead to increased security. Understanding and tackling financial crime within the framework of open banking is critical to the long-term viability of the financial services industry.
Mitigate Financial Crime Risks with Open Banking
Tavas
Open Banking Product Suite and Solutions
Mitigate Financial Crime Risks with Open Banking
Tavas
Open Banking Product Suite and Solutions
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