Every year, financial fraud costs consumers and businesses billions of dollars. In 2023, fraud losses surpassed the $10 billion threshold, indicating that the stakes are higher than ever.
As a financial leader in your organization, you have the responsibility to spearhead fraud detection and prevention initiatives that protect the company’s bottom line while also safeguarding customers’ wallets from criminal activity. The question is, how do you keep up with fraudsters’ sophisticated attacks while also fulfilling your other fiscal responsibilities?
Advanced analytics and machine learning (ML) are the great equalizers in the fight against fraud. Here’s how you can integrate these technologies into your detection and prevention efforts.
How Analytics and ML Fit Into the Fraud Prevention Equation
Advanced analytics involves the use of sophisticated techniques and tools to analyze complex datasets. It goes beyond traditional descriptive analytics by incorporating predictive and prescriptive concepts into the workflow.
Predictive analytics helps you determine what will likely happen next, and prescriptive algorithms provide recommendations to achieve desirable outcomes.
Machine learning, a subset of artificial intelligence (AI), enables systems to learn from data and improve their performance over time without being explicitly programmed. ML algorithms can identify anomalies, detect patterns, and predict future outcomes. More importantly, machine learning promotes software evolution, enabling your anti-fraud technology to adapt to increasingly sophisticated threats.
Adopting Techniques for Fraud Detection and Prevention
Advanced analytics and machine learning are fueling the following critical detection and prevention tactics.
Anomaly Detection
As the name suggests, anomaly detection focuses on identifying discrepancies or abnormalities within a network. These anomalies often indicate fraudulent activities or attempts to breach your digital infrastructure. Either way, they are bad news.
By using machine learning to detect these abnormalities sooner, you give your cybersecurity professionals the best chance of stopping threats in their tracks.
Predictive Modeling
Predictive modeling uses historical data to determine what will likely happen in the future. In fraud detection, these models can analyze past transactions to identify characteristics of unusual behavior.
By training ML models on labeled datasets (fraudulent vs. non-fraudulent transactions), you can predict the likelihood of fraud in new transactions.
For instance, an ML model can analyze a cardholder’s typical transaction behavior. Suppose that a particular customer never withdraws more than $200 at a time and always uses their card in a specific geographic area. Suddenly, they attempt to withdraw the maximum limit of $500 in a different zip code. Through predictive modeling, an anomaly detection system could flag the transaction and verify its legitimacy.
Network Analysis
It’s virtually impossible to manually monitor a large company’s network. You need the help of ML, analytics tools, and automation technologies. Cumulatively, these solutions magnify the reach of cybersecurity professionals and make it possible to uncover anything unusual before it results in a successful attack.
The best network analysis solutions monitor the digital ecosystem in real-time. Additionally, they can proactively contain threats while IT personnel are notified. This notify-and-contain response limits a threat’s access to financial data and mitigates the damage caused by fraudulent activity.
How You Can Roll Out Robust Fraud Detection Protocols
Before you invest in new technologies or revamp existing policies, you need to define your threat landscape. Where is your business vulnerable, how big is its digital footprint, and what assets do you need to protect?
Once you know where you might be vulnerable, create a hierarchy of fraud detection and prevention objectives. Your most important objectives will be prioritized when investing in new technologies or allocating resources.
Next, you’ll need to unify critical financial data, including information from transactions, customers, and external sources. Ensure that the information is clean, accurate, and error-free. You’ll need a robust database to train your machine-learning tools and run complex analytical processes.
After you’ve gathered the necessary information, it’s time to select your fraud protection tools and train your models. Consider factors such as scalability, user-friendliness, and integration with existing systems. Ideally, you want fraud detection technology that readily integrates with your enterprise resource planning (ERP) and accounting solutions.
Finally, commit to continually monitoring and improving your new tools and protocols. Regularly review your fraud detection and prevention strategies to ensure they offer protection against the latest threats and attack mechanisms. Be flexible and make adjustments as needed to stay one step ahead of fraudsters.
Do You Need ML and Analytics to Stop Fraud?
One of the biggest mistakes that financial leaders make is thinking that fraud will never happen to them. Another common misstep is becoming complacent or thinking that their fraud prevention technologies are good enough. Neither is true.
Because cybercriminals are becoming increasingly sophisticated, you need to adapt or risk exposing your business to unnecessary threats. Be proactive and embrace emerging technologies like machine learning to give your business an edge in fraud prevention.
