Every year, financial fraud hits companies and individuals with billions of dollars in losses. According to estimation by International Monetary Fund (IMF), global money laundering can be between 2% and 5% of world GDP. Amongst the worst hit companies when a financial fraud takes place are the financial institutions. Trust of customers is compromised and security measures taken by the financial institutions are breached every time a fraud occurs.
Back in November 2014, Livemint reported a case of a customer named Pragnya.¹ The bank reached out to her to check if a transaction worth INR 35,000 was initiated through her debit card, which she had not. Another call was made by the bank to check if a new transaction worth INR 25,000 was initiated through her debit card. This rose suspicion of a breach leading to cancelling of the debit card of Pragnya. Such instances have grown steadily adding fear to the customers of financial institutions.
According to Deutshce Welle, over 100 banks in 30 countries around the world have lost $300 Million to $1 Billion in 2014.² This is due to online banking fraud that includes hacking of the legacy IT systems by hackers from Russia, China and Europe.
To combat such losses, financial institutions are using atleast 2 ways to keep financial fraud in check. They are:
1. Implementing procedures to not only identify their customers but to actually know their customers. This procedure is popularly known as “Know Your Customer” (KYC).
2. Investing in solutions like Business Process Management (BPM) that give them a holistic view of the business processes. Pointing out irregularities in the business process and to enable faster decision making in case of a suspicious activity.
1. KYC –Implementing KYC procedures have helped financial institutions in mostly 3 ways:
a. Help screen customers to check if they are sanctioned* individuals or companies.
b. Help keep up with compliance and regulatory requirements (such as Anti-Money Laundering) by using industry guidelines as a tool to either process or reject a
c. Enhance customer relationship by having a consolidated view of the source a
customer receives money from.
*Authorized by the financial institution to conduct transactions legally.
A case study of implementing a KYC procedure in a bank can be seen by clicking on the following link
2. BPM – Financial institutions are using BPM solutionsfor various purposes such as increasing operational efficiency and keeping processing costs low.
In some cases, reporting financial frauds at the right time with right information is crucial so as to keep up with the compliance and regulatory requirements. In event of a fraudulent activity, BPM solution red flags it and the activity is reported, leading to a detailed investigation if necessary. This process is automated, thus speeding up the reporting process to keep up with the compliance and regulatory requirements.
Financial institutions are optimistic of checking growth of financial frauds. This is mainly due to their investments in BPM solution and implementing KYC while adhering to compliance and industry regulations. Further changes to industry regulations and introduction of new features in BPM suites will strengthen prevention of financial frauds leading to rise in customer confidence.
1. Livemint, “Banking, finance firms to spend Rs469 billion on IT in 2014: Gartner,” November, 2014.
2. Deutsche Welle, “Hackers steal up to $1 billion from banks,” February, 2015.