The Banking Buzz: Staying Ahead of the Curve with Top Fraud Risks from the Federal Reserve’s Latest Risk Report

Today, my name is Cara Talcott. I am the Marketing Communications Coordinator here at Alligent. In today's webinar, we're going to be going over the top fraud risks faced by institutions, emerging threats, and what those look like for FIs, and how your institution can develop a proactive fraud mitigation strategy. We have a great lineup of speakers here with us today that are ready to discuss all things fraud. We have Doug Hendrix, our Senior Product Manager for Payments for Allergen, and James Watts, the Director of Product Management for Transaction Trust and Services at MiTech. If any questions come up during the webinar, please feel free to type them into the chat box. We'll have a designated Q and A segment at the end. And with that, I'm gonna hand things over to Doug and James. Great. Thanks, Kara. James, thanks for, thanks for joining today. Absolutely. My pleasure. Always enjoy the the conversations. And so, I think this is a good one, you know, a little bit kind of a a different flavor sometimes from the fraud conversations we have when we're talking about check fraud. So, you know, not just about digital solutions but, you know, a good a good opportunity to talk about, you know, what's going on out there and and why digital solutions and partners like, you know, Alligent and MyTech have something real unique and beneficial offerings to the banking industry landscape. So jumping right in, you know obviously the expertise of MyTech, Looking at some of these numbers, like, what what do these really jump out at and, like, you know, what does this tell you just from the the numbers that we've seen, previous years and then estimated to go forward? Yeah. I mean, the first thing that jumps out at me, obviously, is the thirty billion dollars of estimated check fraud losses for this year. We're only ten months into the year and we're already outpacing the previous years. It seems like it's just going to continue growing. But when you look at that, what you look at the consumer losses, and this is looking at not businesses or organizations, but individual consumers lost twelve point five billion dollars to fraud. And that scams everything across twenty twenty four, which, you know, each individual one of theirs is a different story and a different person or family impacted, what makes this such an important topic. The other thing you're seeing is just growth across all the different fraud vectors, not just check fraud. You've got synthetic identities, mule accounts, scams and fraud scams and, exploitation is is obviously on the rise. Yeah. I mean, it's certainly I mean, the numbers are certainly huge, and and growing. And so, you know, yeah, always a a worry. So why don't we jump in and, you know, going into that, we can take a look at, you know, the landscape of what, the FRS survey showed, which is interesting. And then we we have an allergen survey that we looked at some numbers to compare. I mean, I I think, you know, the one that stands out to me is, you know, endorsement forgery, and payee forgery are two that I know in you know the digital solutions world obviously we're no longer living that that brick and mortar life and in person physical you know teller lines and you know drive through scenarios. The the endorsement and the payee forgeries, you know, those jump out at me because that, to me, working with, you know, partners like you, and that's a solution that we focus on, you know, calling those out and making sure those are focus points in business rules, and yet payee forgery seems to be doing up. Yeah. You know, it's I always say what's old is new again. Just the ways of doing it have changed. Right? It's not as much as what we've seen in in history about, taking a check, washing it in acetone, whiting out the name and rewinding it. All of this is done digitally now, with simple photo editors, Photoshop, free tools on the Internet, the checks can be digitally manipulated. Plus, a day goes by that you don't see another one or three articles on another mailbox theft. So it's really an economy of scale coming from organized crime. I know this was the Fed study that was done in twenty twenty four. What we're actually seeing a little bit different now is kiting is actually making a comeback. Because of the the different ways of getting money out of an account now that made it easier with all the different p two p apps, that now all the different instant payments. It's making it easier for kiting events to actually happen. That's a really good call out because, I mean, you know, historically speaking, you'd have to leave one branch to drive to another. But today, you can pull funds that, you know, even if it's only a partial that's been made available, you can pull those funds out just as quickly with the phone that you deposited them from. So it's a real it's a really all out. You know? I I think one of the things that stands out from the payment risk survey and, you know, really looking at this one, I think the thing that jumps at me the most is experienced attempts, you know, versus experienced losses. Because to me, that highlights and you you see it in the card space and you see it in the check space. And to me, we we all know about the card space and, you know, push notifications. But I think when I look at the frequently experienced attempts, obviously, some of those are getting caught when you compare them to experienced losses. And it it to me, it's gotta resonate that that has to be due to fraud prevention, digital solutions. You know, and so I think it's interesting to see how, really, it's almost double the attempts versus what's actually going through. Well, I think another aspect that you gotta remember when we talk about check fraud specifically is, you know, there's there's a natural delay and there's more tools available even without a fraud monitoring system or fraud prevention system with just the way naturally, the checks are cleared. So there's a little bit more opportunity to put an extended hold on it if the situations apply under RegCC. So you're always going to have a disproportionate different variance between the number of attempts and what actually gets through just by the nature of how the payment vehicle works. But it is what what's interesting to see is that even the number of attempts are continuously rising, which is going to drive the the actual losses up as well. Yeah. It'd be it'd be interesting to have kind of a, a zoom in on that to see from that landscape of the attempts. You know, was it a hold scenario that caught it, or was it, you know, a day zero real time callout that potentially caught it for fraud prevention? It'd be interesting to see a zoomed in lens on that one, I I think, for sure. Definitely. And, it it would it would be interesting also to see, you know, just from the nature of the attempts that are made, what is what is the commonality between the different attack vectors? Yeah. Yeah. Agreed. Alright. And so we have an open survey right now that I think the QR code will be on at the end of this if you wanna you wanna take it, but we kinda took, obviously, the the product and solution approach. But, really, our goal is to, you know, reach out and find out, you know, where does check fraud sit as, you know, a a concern strategic initiatives for banks. And I think, James, you know, we've had these conversations before from looking at, you know, the solutions, the capabilities, whether it be image analysis, make your line review. Do you focus on in clearing and deposits? Obviously you know you get a lot of you know the same answers yes yes we do. You know the one that always jumps out at me coming into the next screen is you know how concerned moderately and very high. There's not anybody out there that's not concerned at all or slightly concerned. You know, and so you can't help but wonder, you know, when you talk to FIs and banks and you see kind of the numbers coming out of federal reserve, everybody's concerned about it. You know yet one of the things we know and conversationally talk about is you know the road map initiatives and here it is. They're highly concerned, very motivated, you know very concerned and yet check fraud mitigation sits in the middle of the road map initiatives, for the FIs. Again, common theme that we talked about. What do you think would be the appropriate lens to kind of put to that to, you know, see the number of attempts, see the losses actually happening, and yet help banks understand the importance behind getting that that road map initiative going and, you know, getting it planned? Well, I I first off, I do wanna say I'm glad it's moved to the middle of the pack and not at the bottom where it's been, you know, four or five years ago. I hate to see it up there too because that means there's more issues around it. But, really, what it comes down to is it's almost a mindset shift because, traditionally, financial institutions are used to working through a very tunnel vision or a secular lens. Right? It's only within their walls. And as my colleague Carrie Camley likes to say, one FI's ink clearing problem is another FI's deposits problem. It's not a me problem. It's a we problem. The only way that the industry can actually make a dent in it is by working together and taking it seriously. And I think some of this also has to do with institutions that really haven't taken a loss yet. Yeah. And I say yet because, as we'll discuss later, the fraudsters are collaborating and know where you are. Yeah. It's it's coming. Right? And I and I think that's one of those where you hear the narrative that, you know, with a check, the actual number of checks being processed, the volume has gone down. It's one that I always like to push back and say, well, that's true. But if you look at the dollar amount that is occurring at a fraudulent level on the individual transaction, that's going up. So your your risk is not getting reduced because less checks are moving. It it's actually increasing because there's a little more boldness now in the fraudster landscape of, well, if I'm gonna do it, I've gotta get the most value out of this that I can. Yeah. I mean, the other thing we've heard too for decades now, right, is checks are going away. And even the last Fed payment study that came out last year, ninety one percent of small businesses still wrote checks. So, there's still an active market out there that's going to take a long while and there's going to be a long tail to get them converted to instant payments or electronic payments for a myriad of different reasons. And while that tail is still in place, there's still gonna be the risk. The risk is always gonna be increasing. Yeah. Yeah. Absolutely. Alright. So let's carry that into, you know, again, I think, you know, kind of a different flavor of a lot of fraud conversations, but really kind of what what's going on in the market today? What's driving those numbers? Because I I think, again, to your point, it's all digital now, which is, you know, completely different than it used to be historically. And then that's also kind of made it, you know, somewhat of an easy path to you know, if I'm gonna commit fraud, let me let me try check fraud. Right? Yeah. Absolutely. You know, I refer to, check fraud as the gateway drug of fraud because it's stupid easy to do. You know, it used to you know, a while ago, it used to take some insider knowledge on how to how to commit it and how to actually get it through. But now, with the use of the digital tools, it's it's really easy to do. And then you also have this, emergence of what we call fraud as a service. So the fraudsters are actually collaborating and teaching others how to scale and teaching each other what banks to attack, where to go, how what policy limits are. I say kind of tongue in cheek that the fraudsters typically know the bank policies better than bank employees do. Yeah. Yeah. I mean, that's certainly that's one where I I can speak. You know, former life at one point was a bank teller. And, you know, that was something that we knew made it more difficult. And, you know, at back then, we even communicated across other financial institutions that were in our immediate area, communicating what we saw, what was happening, and what was going on. But, you know, the speed in which we could move with a telephone call, it doesn't touch, you know, the the digital landscape of the moving parts today, which, you know, I mean, I think we've talked about this as well. There's a significant difference today in, you know, fraud prevention versus fraud mitigation. Right? Those are two very different things today when they used to be the same. Yeah. Abs absolutely. And I think there's a lot of traditional thinking of the fraud mitigation type where I'm waiting for it to come into my doors, waiting to to rely on it, and then I'll mitigate the fallout. Now with just the speed of the attacks, the variety of the attacks, and everything being connected, the mind shift has to switch to actually moving to prevention to prevent the loss from actually starting. Yeah. I mean and like I said, the the the this picture speaks for itself because I think this is the one that everybody knows, you know, mobile teller ATM, you know, forgeries altered and proper endorsement. And, you know, that that mobile space, that ATM, that ITM space, you know, there's a expectation on the depositing side on, you know, the the initiator consumer or business, whomever it is. In today's world, there's expectations around the funds availability. And so, you know, driving that digital aspect of making it available, it's it's almost an instantaneous landscape of, you know, fraud potential, and certainly the the heartbeat of where you wanna play in your your prevention points for sure. Yeah. Absolutely. Real time is definitely required at this point, because what I always joke is just because it's a slower payment doesn't mean the fraud is any slower. The fraud is still happening in real time. Yeah. Yeah. For sure. So you touched on something and, you know, we've talked before, but I I thought it would be, you know, a great landscape of conversation for this webinar is, you know, the checks for sale and the challenges faced. Right? What what what exactly is that landscape? Because I I know that, you know, you guys, that's your industry expertise, expertise, and you participate with all kinds of law enforcement landscapes, you know, looking into the dark web. You know, talk a little bit about this space because I don't think this is one that comes up very much in conversation when talking about check fraud, maybe from a solutions perspective or just a general perspective. Yeah. So, when we talk about and I always giggle a little bit. When we talk about the dark web, Most people are referring to Telegram. That's been the platform that gets a lot of attention from across the industry, for fraudsters to communicate. But they're a social media platform. They're everywhere. Facebook, they've gotten brazen and bold. I always say that anybody here is two clicks away from joining a check fraud group on any of the social media platforms, even Pinterest or TikTok. They're they're on all of them. And they do a really good job of marketing and branding on what success they're having, and then they share those best practices. And it usually all starts with mail theft, whether that's insiders at the postal service, or that's arrow keys and hitting the bulk collection mailboxes, and looking through grabbing all that mail, taking the checks for out of it, and then selling them. From there, people will buy the checks, alter them as they see fit, and then deposit them. You know, a a fraudster that wants to commit check fraud doesn't even have to leave their house to do it anymore. Yeah. From there, you know, you're moving into talking about mule accounts and synthetics. You know, typically, what we see happen in some cases is that an account will be funded with a fraudulent check, and then there'll be a whole bunch of withdrawals of different methods to get the money out of that account before it comes back and is returned as fraudulent. And these are these are seasoned dormant accounts that are been open for a while. They're they're aged, so normal rules apply. So that that's interesting because I remember when new account opening got started on the digital platform, the digital offering, being able to do it online. And that was the big fear was the fraudsters coming in, opening up the fraudulent accounts. And certainly there was so much effort put behind that prevention, and mitigation point to do it. It's interesting to hear that it's actually probably shifted a little bit now from when that originally got started to, you know, probably better at catching that. But yet the fraudster said, alright. Well, we'll stop opening accounts, and now we'll figure out a way to use, you know, accounts that have been open for a few years and still do what we wanna do. Absolutely. I mean, since the shift and most of the crime most of the fraud that you see committed is actually organized crime. There's transnational groups, some are even state funded, that put a lot of resources behind this because it is big money, and it's relatively safe. For example, you know, we've seen a check stolen on or for sale on Telegram. Two days later, the payee was altered and deposited. Now, luckily, we were able to catch this and it was confirmed as a fraud. But what most people don't realize is that same seed check there was is on average used another eight to fifteen times to commit other fraud. And what happens typically in that situation when that fraud occurs, to protect the customer, the financial institution is gonna close that account. Well, all of that subsequent fraudulent attempts that are attempted are then just returned as closed account and don't actually look at the fraud attempts. They're not connecting that dot. Alright. So now me, the receiving the return file, getting the closed account message versus attempted fraud, I don't that nothing goes off on my radar. There's no alarm bells. No nothing. I think it's just a closed account return. But, yeah, in reality, going back to the, you know, we versus me scenario, in all reality, if that had been a a closed account due to fraudulent checks, you know, that might be something there at a ingestion point that I could say, okay. Well, let's make sure we make a note of this information. Hopefully, you know, again, to your point, better connecting and better protecting the community. Alright. So from there, you know, the frontline branch workers is still an impacted space, which seems somewhat almost ironic to a certain extent because for as long as tech fraud has been going on, you would have thought that, you know, the digital age has taken over, which it has in the way that, you know, the moving elements of a stolen check can move, but yet we're still seeing it happening directly at the teller lines, at the branch lines. And we had conversations from, you know, the product side of things to say, alright. Well, how do we how do we change this business rule? How do we update this messaging? You know? Yet the variations of check stock being used, you know, I mean, the information speaks for itself. What what would you say, you know, for the frontline branch workers is the common theme of the struggle? Well, there's just so many variations. You know, unlike most of the other countries in the world, we have a lack of a central standard of one way of doing things. When that comes to identity documents, check stock, a lot of countries have only one check stock and it looks the same for anybody who uses it. Ours, customers can go print off the off the Internet or even go to Office Depot, buy check stock, and print their own checks at home, and it's fully okay. So given all of that variation, you can't rely on your tellers to be a subject matter expert at all of that. So you need to rely on technology and tools to make it easier and weed through all the noise while also not discriminating. Because that's that's another common thing we see is the teller lines. You don't wanna have that perception of any type of discrimination, because of the the regulations and the laws. So taking that out of the teller's hands is also important. But then also, you know, maybe watching for insider threats too because these fraud groups will do matchmaking service across the institution from the call center to the teller to the back office, anywhere they can to get that in to be able to then attack the bank. Yeah. I mean, you know, this one that's been you know, it hasn't changed. The the expectations of the the consumer and the business client, you know, that that experience, that's that's still the same regardless of all the changes around them. And it's it is important for it to be a good experience for funds to be available when they're supposed to be available. I saw an interesting article talking about the trust between consumers and banks when fraud occurred. And trust went up when the bank was able to walk their consumer through in what is a negative situation, kind of a positive experience of, hey. Well, you know, this is what happened. This is what we saw. This is what we're going to do. This is what our, you know, solutions and our research has shown us. We're gonna make you whole. Everything will be okay versus banks that pretty much just, you know, went through the seven to ten day, you know, make a consumer whole process, two very, very different scenarios of, you know, customers saying, yeah. This is my bank, and I'm here for it in allegiance, You know, versus the ones that, you know, just felt like, well, you know, they they they didn't they didn't do anything. They're not doing anything. So I think, you know, moving to to that landscape, obviously, you know, we see on our our side really the focus and, you know, what we have with you guys in the partnership is, you know, the real time call outs. The the you know, if you can do it on day zero, your your sign your opportunity for fraud prevention goes up. Right? And then kind of layering in as, you know, you've talked about and the what you guys do as as many elements as you can from the image analysis to the business rules. You know? And so I mean, I think in that landscape, you know, the uniqueness of what you guys see and what you do, you know, what would you say, you know, is the strategic path forward, you know, for for banks and FIs if you're not heavily playing or if you're just thinking about getting started? You know, what does that space look like? So two things come to mind. One is information sharing, and I mean that internally. A lot of times, you may have different fraud teams working on different types of fraud, and you lose the ability to put the whole picture together there. And second, real time. Getting as close to the point of presentment, whether that's the mobile device, the teller line, the ATM itself, getting to as close to that point of presentment as possible gives you the most opportunity to stop the fraud from occurring. And then at the end of the day, protect your customer or identify the bad actor. Yeah. I think that's a really great statement as well. Right? Because it really is a twofold effort. Like, you want to make sure you're doing right by your customer, but it's almost gotten to the point now when you look at the numbers that we saw in the beginning that are out there, it's almost just as important, you know, to catch the bad actors. And then, you know, like you said, ideally, in a utopian world, we would be sharing that information across the landscapes with each other, creating a much better unit of protection around, you know, our consumer and business bank accounts, than the challenges that we face today. Absolutely. And I'm hoping, with FinCEN's recent release on, cross border information sharing that they'll come out come with a clarification domestically as well. Yeah. Okay. So we mentioned it or I mentioned it earlier that the, allergen product survey is still out there, and it's still open. Feel free to, you know, scan the QR code and put that in. And looking at the clock, it looks like we have a few minutes. So, we'll go ahead and, you know, open up to to the questions aspect to see if we have any questions out there. Yeah. Thank you, Doug. We also put the link to the survey in the chat. So if you don't want to scan it on your phone through the QR QR code, you can just use that link right there. Now as for questions, it looks like we just have a couple in chat right now. First one, why should a bank invest in a check fraud solution? Alright, James. I'll let you I'll let you go first. Alright. So as we said earlier, checks aren't going away, as much as anybody on the real time payment side wants them to. They're they're gonna be around for at least another twenty five years, if I had to guess. The the threat is only increasing, even as volumes do go down. And as the threat increases, you it it's not a problem that you can just throw more people at or continue on as you're doing. The legacy tools that have been used in the past to be able to fight fraud don't always work today because the fraud is much more organized, it's digital, and it's everywhere. Yeah. And I think I I completely agree, and I think I would, you know, include there, you know, coming from, you know, kind of some of the stuff that that we see on the product we talked about is that that that infrastructure piece. Right? Because I know that you guys have initiatives and road maps and, you know, being innovative and, you know, looking forward, you know, what you're gonna do differently, what you're gonna bring to the table, down the road, and we think of it the same way at Allergan. So I think one of the things I I try and present always is making sure that you're prepared to be able to support what comes. Right? So I think there's some really good things that will come down the line in check fraud prevention, but, you know, like you said, the legacy space, if that's a space that you're still unfortunately clinging on to, you might not be able to take advantage of some of the latest and greatest fraud prevention and mitigation tools. And it it may take a while to get ahead of the fraudsters, but I'd be happy with catching up. Yeah. That actually leads right into the, the next question that I see in chat. Why does check fraud continue to increase? Alright, James. You're the expert. Honest answer because it's stupid easy. It's easy to do. It's it's an easy attack vector. It doesn't cost much from to get into it, to get the tools needed to complete it. And there's a philosophy from the fraudster side for most of them that it it's almost a victimless crime, not realizing the people and organizations behind it, there's real impact. But that seems to be the mentality of the fraudsters that I see that are advertising that. So, yeah, it that that's why we're gonna see an increase until we make enough of a dent into it that it doesn't become as easy to do anymore. Yeah. I mean yeah. I I I couldn't agree more. So I think it looks like we are right at time. So any additional questions pop in, Kara? Nope. That seems to be all of them, which is perfect timing. Thank you everybody for joining us today. If you do have any additional questions, please reach out to marketing at alligent dot com or visit our website. Make sure to check out our events page for all future webinars if you enjoyed this one. Also be sure to take the survey linked in chat or up on screen. We appreciate your time with us here this afternoon and we hope you have a great day. Thanks, James. Thank you. Thank you.