IIntroducing new banking products in the financial services industry is an exciting venture and what gives financial institutions a competitive advantage. However, with all innovation comes great responsibility, especially when it comes to safeguarding those new products against fraud. It is no secret that a significant increase in fraud is one of the biggest concerns financial institutions face today. Fraud scams and bank fraud schemes resulted in $485.6 billion in losses globally last year, according to Nasdaq’s “2024 Global Financial Crime Report.” For financial institutions, fraud can cost up to $4 in legal fees and recovery for every dollar lost. Banks of all sizes need practical tools to win the fight against fraud, so it should be no surprise that 31% of financial services organizations plan to add new technology systems to fight fraud, compared to 10% in 2021. What’s more, FinCEN included fraud in its eight anti-money laundering/countering the financing of terrorism (AML/CFT) national priorities in 2021, explicitly linking fraud detection and prevention to AML/CFT responsibilities for the first time. Historically, the operational functions of fraud and AML/CFT have remained wholly or partially siloed. However, AML investigators identify many fraudulent transactions and patterns. Especially when introducing new products at your bank or credit union, AML, fraud and cybersecurity teams must collaborate. Financial crime professionals should insist on a “seat at the table” when new banking products are first introduced. Expertise in fraud and anti-money laundering (AML) must be represented in all new product development and marketing conversations. Financial institutions should consider taking the following steps to mitigate fraud risks associated with new banking products, emphasizing the importance of fraud prevention and detection to lower the cost of fraud. Prepare a Comprehensive Risk Assessment Before launching a new financial product or service, conducting a thorough risk assessment is crucial. Identify potential risks, vulnerabilities and AML deficiencies, and assess the likelihood and impact of different fraud scenarios. For example, many banks and credit unions looking for a competitive edge are considering implementing FedNow services. First, they must evaluate whether their institution is prepared to insert AML risk management procedures into the transaction process to match the speed FedNow can offer. This step sets the foundation for effective risk management by understanding the unique challenges associated with the product. Establish Clear Policies and Procedures Once a new banking product is approved, develop thorough policies and procedures to mitigate any risks identified in the risk assessments. Procedures should address both detection and reporting methods. Staff should be well-trained in procedures and understand the importance of fraud detection to the bottom line. Implement Robust Fraud Detection Software Investing in advanced fraud detection software is a cornerstone of fraud mitigation. These systems utilize cutting-edge technology to analyze patterns, anomalies and unusual behavior. By employing state-of-the-art technology, financial institutions can stay one step ahead of fraudsters, ensuring a proactive approach to safeguarding their new products. Adequate staffing is also essential, as fraud alerts must be worked quickly to protect against hard dollar losses while complying with funds availability requirements. Introduce Proactive Risk Management A dynamic risk management strategy ensures that new financial products are shielded from evolving fraud schemes. Safeguarding New Banking Products From Fraud By Terri Luttrell, CAMS-Audit, CFCS, Abrigo Colorado Banker 6
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