Fraud has become increasingly difficult for financial institutions to catch and remedy, says Steve Sanders, chief risk officer at CSI. In his role at the core banking provider, he saw one bank deal with $140,000 worth of check fraud over the course of about 40 days. “The signatures were perfect, the writing was perfect, the checks were perfect,” Sanders says. “Come to find out, it was an insider at the bank in operations. It was actually their best employee, and this employee was taking pictures of customer files and sending those off to the fraudster.”
That is hardly an isolated incident. According to Andy Lapp, CSI’s senior director of product management for financial crimes, check fraud has risen 600% since 2020. And no, that is not a typo.
In a recent conversation with Bank Director Executive Editor Jackie Stewart, Sanders and Lapp discussed the fraud trends financial institutions are dealing with — including real-time payments and artificial intelligence — and how their teams can improve fraud prevention.
The interview has been edited for brevity, clarity and flow. To watch the full conversation, access the webinar recording here.
FXT: Why has check fraud become so prevalent?
Lapp: Check volume has decreased, but it’s still around — and now you have mules walking into the bank teller and trying to get cash right away from that check. You’ve got AI and machine learning. You’ve got printers that are better than anything [before] now. So, printing a forged check is easier than ever, and therefore you need tools in place to help get in front of that [and look] at the behavior of that individual. Is this outside that norm? Does this check look like the other checks in the customer’s profile?
Sanders: It’s a combination of the low-tech end of that along with a high-tech exploitation, and it makes it hard to combat. And so, you’ve got things going on like mail theft, which is easy to do, and then you do the check washing combined with that. And I would be remiss if I didn’t say this last part — right now the banking regulations when it comes to check fraud favor the fraudsters, not the banks, because we’re expected to clear those checks in a certain amount of time.
FXT: What about washed checks? How are banks handling that?
Lapp: Right now, it’s growing with technology, washing that check, because it’s a legitimate check and now you are writing over the top of it. You need technology now to review that check. Eyes won’t do that anymore. You need to compare that to the profile at the bank. You need to compare it to other checks. Are there anomalies? Is that signature different? What is the pixel count? Does it look like there’s ink underneath the ink?
Sanders: Banks have a real opportunity to improve what they’re doing. And one of those is around customer education. For example, if you use gel pens, it’s much less likely that the check can be washed. So, maybe the bank should give away gel pens with the bank’s name on [it] to encourage people to use them.
FXT: What’s a good way to target customers to tell them about these issues?
Sanders: We need to be doing drip campaigns with our customers, and that means little reminders that happen over and over and over are much better than big reminders that get ignored because we tune those things out. It needs to be done in a way where the customer recognizes that this isn’t just protecting the bank; this is protecting the customer.
FXT: What do you see as the next big threat over the next 12 to 24 months?
Lapp: Real-time payments. And unless you have a plan to bring in real-time fraud protection with the real-time payments, you are going to watch your money go out even faster than it was before. The whole strategy going forward in the next 18 to 24 months is coming up with a multilayered approach to address real-time fraud.
FXT: Can you talk about the role AI might be playing in the next few years in terms of the schemes that these fraudsters come up with?
Sanders: The one that worries me the most is voice cloning. If you think of all the systems that we have historically created that you could authenticate by your voice alone, that one worries me quite a bit. Also, when you see a really good deepfake video, it’s very convincing. I do think we’re going to see AI being used to push out fraud at scale.
FXT: How can banks use artificial intelligence to help combat fraud?
Lapp: You’ve got to fight fire with fire. What are the tools out there that are at the cutting edge of AI/machine learning? Because at the end of the day, you’re looking for behavior anomalies. You’ve got to detect that, and you have to do it in real time. You have to look at all this data and make decisions in milliseconds, certainly much quicker than a human can do.
FXT: How frequently should banks be reviewing their fraud prevention tools?
Sanders: I think annually is probably good for a quality [review]. But you also have to be doing that real-time analysis because the world is changing faster than it has ever changed, and you don’t want to wait a year if the newest fraud’s coming out. This can be ad hoc: “Hey, this is the latest fraud we’ve heard about. How are we handling that fraud?” And we ought to be ready to discuss those at management meetings or board meetings, because I think we don’t want to take our eyes off the ball.
FXT: What role should the board be taking in helping the bank fight and prevent fraud within their institutions?
Lapp: The guarantees in life are death and taxes, right? Well, the other guarantee is fraud is going to go up for the bank. That’s going up year-over-year. It’s been proven now. So, a lot of banks are creating fraud teams, getting in front of this. Do you have an increased budget for fraud prevention, or are you just using the old budget with the old tools in place for batch fraud? You are never going to get in front of this [that way]. So, having the board understand there needs to be a budget around this [is important].
To learn more about enhancing your bank’s fight against fraudsters, read Bank Director’s research report, The Fraud Menace: Protecting Your Bank, sponsored by CSI.
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