How AI is Revolutionizing Fraud Detection

Chances are you’ve heard a lot about artificial intelligence, or AI. New applications for AI seem to be creeping into every industry, causing major disruption. One of the most interesting and useful new applications is in the financial sector for fraud detection and prevention. 

Fraud can have disastrous consequences if the proper precautions are not put in place, especially for financial institutions processing large transactions. Given the amount of money being sent back and forth via wire transfers, it’s a matter of when fraudsters are going to strike, not if.   

Because of this, financial institutions are looking for new ways to protect customers’ money, which is where AI can come into play. In the financial industry, AI computer algorithms and models can be used to detect suspicious activity and behavior patterns that might point to cybercrimes ranging from identity theft to payment fraud.

With this information in mind, let’s delve into the benefits of using AI for financial institutions.   

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Table of Contents:‍

• ‍Benefits of Using AI to Detect Fraud‍
• Types of AI Fraud Detection‍
• The Future of AI in Fraud Detection‍
• AI Technology Isn’t Enough to Prevent Fraud‍
• Dangers of AI‍
• Considerations When Using AI

Benefits of Using AI to Detect Fraud  

The biggest benefit of using AI to detect fraud is its ability to recognize highly complex fraud practices and to catch them immediately. AI can analyze multiple devices, accounts, and locations simultaneously and can also detect fraud occurring across more than one channel. For example, it can pick up on fraud that’s happening online and in-person. The result is an increase in the number of fraudulent transactions that get caught and a decrease in false positives.

It continuously learns

AI can be trained to recognize emerging types of fraud, so its value doesn’t depreciate, and it never needs to be replaced. AI uses continuous learning, which involves training the algorithms with new data to make them more accurate and effective. Continuous learning allows the system to stay up-to-date and recognize the latest fraud tactics.    

It manages risk effectively

Another benefit of AI is risk management. Through predictive algorithms, AI acts as a preventative measure and alerts financial institutions to potential fraud threats before they occur. Stopping fraud before it happens greatly decreases institutions’ risk of loss and liability.        

It's a scalable tool

AI is also a scalable and affordable solution. As the volume of transactions grows, AI is able to keep pace, and its monitoring capabilities can be expanded without needing to increase staffing. Existing employees are then free to focus their efforts on more strategic tasks.

It can support customer service

Lastly, AI can help increase customer trust and satisfaction. This may be surprising as most people are familiar with customer-facing applications, like automated customer support chatbots, which can be frustrating and ineffective. However, behind-the-scenes applications of AI, like fraud detection algorithms, actually provide a more positive customer experience. They create a secure environment where customers can know that their transactions are protected. This means more loyal and satisfied customers.  

Types of AI Fraud Detection

Let’s take a look at three types of AI fraud detection and explore how they work so you can identify which types are most useful for your organization. 

1. Automated Anomaly Detection: AI algorithms are trained to automatically recognize patterns in data that indicate anomalies, such as unusual transaction amounts, several transactions from the same device, or purchases made in multiple locations in a short period of time. It then flags these transactions, stopping fraud in real time.  
2. Behavioral Analysis: This type of AI learns how to detect fraud by analyzing customer behavior patterns and detecting shifts. Examples include a customer suddenly changing spending habits or making transactions in unexpected locations.
3. Natural Language Processing (NLP): NLP intakes customers’ communications, such as emails or chat transcripts, to learn their usual patterns. It then flags any deviations from that pattern, like if a customer suddenly changes their account information or sends multiple password reset requests.  

The Future of AI in Fraud Detection

AI technology is rapidly evolving and there are exciting developments on the horizon. As NLP continues to expand, it will soon be able to analyze unstructured data, such as emails, chat logs, and social media posts. Thanks to continuous learning, NLP will only become more accurate at identifying potentially fraudulent transactions and other suspicious activity. 

Blockchain technology is also expected to become a big part of financial fraud detection. Since blockchain provides a transparent and immutable ledger that can store transaction data, it provides a secure environment. AI can be fed this data and taught to identify and analyze fraudulent activity. 

AI Technology Isn’t Enough to Prevent Fraud 

Despite the strides made with AI technology for preventing fraud, recent cases and statistics show that fraud is still a very real threat and that AI still has its shortcomings. You shouldn’t rely solely on existing AI solutions to protect your customers.

Instead, you need to have your own fraud protection systems in place to shield your company and customers from scams. Social engineering scams are still prevalent, and AI isn’t currently advanced enough to catch them. Employees and customers are still at risk for social fraud, such as business email compromise and phishing attacks. All it takes is one person falling for one of these scams to put your whole company at risk. 

Even with AI, you should take steps to secure all accounts using strong passwords and two-factor authentication, as well as educate your team about the dangers so that everyone involved in the sales process is up to date on the signs of fraud. You can take steps to make your company as secure as possible, including performing company-wide phishing tests, instituting digital hygiene policies, developing data sharing protocols, enabling two-factor authentication, and requiring strong passwords.  

Dangers of AI

While real estate companies can use AI to detect and prevent fraud, scammers also have access to AI technology and are using it to commit fraud. 

Voice cloning is an emerging AI scam technique that allows fraudsters to replicate the sound of someone else’s voice and make it say whatever they want. They will usually impersonate someone you know, such as a relative or a friend, and claim that you need to send money to an account immediately to save them from an emergency or danger. 

While malware has been around for a while, fraudsters are also now using AI-powered malware to more effectively steal passwords and gain access to confidential information. This new technology works in two ways. First, it attacks two-factor authentication to extract PINs and passwords. Second, it hides the malware and makes it undetectable. Once a scammer tricks you into downloading a program that contains the malware, they can proceed to steal your passwords and PINs from your computer undetected.  

Considerations When Using AI

As AI continues to learn from the massive amounts of data it processes, its operations become less knowable to us. This is especially true if AI and machine learning are combined. This is why industry professionals sometimes describe AI as a black box. Humans still need to program and monitor AI, as it should be customizable to your organization’s needs, so hiring employees who understand its intricacies is essential. 

While AI is one of the most effective means of fraud detection, it’s not perfect. It can still return false positives and block genuine users. There’s no way to eliminate this problem entirely, so if you’re using AI it’s good to be aware of and look out for this issue.   

AI is a powerful tool for fraud detection and prevention. The technology is only improving, and it will be exciting to follow its trajectory. In the meantime, to ensure your company is fully protected, consider CertifID. 

We provide a suite of fraud prevention support, including software to help you verify transfer information, fraud recovery services, and direct coverage of up to $1 million for each verified transaction through our software. Another benefit to using CertifID is that we provide the human touch. We’re here to help keep you, your employees, and your customers safe from fraud, with customer support assisted by an expert—not an AI chatbot.

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