7 Bad Anti-Fraud Practices: What to Avoid to Prevent Fraud

Perfecting fraud detection and prevention methods is no easy task; it takes consistent fine-tuning (and refining) of system rules. Operating an effective anti-fraud program has a lot of moving parts, and it’s therefore easy to get wrong.

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Below, we cover the most common fraud prevention mistakes:

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By the time you’re done, you’ll be able to avoid these pitfalls and optimize your anti-fraud program.

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7 Fraud Prevention Worst Practices to Avoid

Let’s get right to it; below are the worst anti-fraud practices that you’ll want to avoid.

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The first mistake made by Risk and Compliance teams is not considering how to track and analyze performance. Without an operational baseline, it will be hard to determine performance, and motivate the team to hit goals.

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When setting KPIs to hit, organizations must consider what actions the fraud team will need to carry out during fraud operations. It’s best to put numbers on those actions, and to make those KPIs realistic according to the line of business. Of course, it will take some adjusting and tweaking along the way. Still, teams can set goals and track performance to identify ways to improve their process, performance, and overall productivity.

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For example, if a risk and compliance team has 5 analysts, their team must consider what they can feasibly handle. It doesn’t matter if they’re using a vendor or Excel; the team needs to be aware of the operational capabilities of team members - and the team as a whole.

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Many companies look at the bottom line of wanting to fight fraud; but don’t consider how to achieve that, including how to leverage all the talent, skill, and output potential they have.

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To achieve success, teams need to set goals and then focus their efforts constructively towards achieving them. To do this effectively, it’s essential to put it into numbers. How much fraud can actually be tolerated? For some companies, this may be $5,000 a month; for others, this may be $50,000. Because of this, a one-size-fits-all strategy doesn’t apply.

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Identify metrics that matter to the organization, track and monitor these metrics closely, analyze performance, and make updates. Having target KPIs, regardless of whether they need to be adjusted, holds R&C teams accountable and points them in the right direction.

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This typically stems from overambitious efforts to cut costs and create the perfect system for a company. However, building a risk and compliance solution in-house is a massive undertaking that requires significant expertise and labor.

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They often end up costing far more to build and upkeep than expected, and rarely offer the customization and performance expected. Even if a company has the expertise and manpower needed, it still may be a bad choice to build a solution in-house.

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Engineering teams will struggle to keep up with rapidly changing fraud schemes, consistently adding new rules to account for fraud behavior. It’s difficult for teams that are struggling to keep up to think about the future and get ahead. Typically, in-house solutions are very hard to upkeep and manage, and extremely challenging to scale with fraud operations.

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Even companies that rely on Regtech can run into problems if they choose the wrong vendor or buy the wrong solution for their needs.

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It’s easy to get lost when making a decision, as most companies offer similar things on paper and speak similarly in terms of sales. Behind all that pizazz, software capabilities are vastly different across seemingly similar products.

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When choosing a fraud detection and prevention solution, a good place to start is with what the team wants and what’s expected from a vendor. Certain fraud detection tools are more flexible than others regarding rule creation and workflows.

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If the team operates from a place of curiosity, flexibility can come in handy because this allows them to test and explore different scenarios with ease. However, if the team is inexperienced, they might perform better with a set of tools that don’t allow for as much customization and provide more “out of the box” rules and functionality.

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Also, if the team can determine their expectations in terms of the level of customer service and support, they’ll be better poised to find the right fit for the business.

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By considering these things before starting the search, teams can have questions ready for the vendor. Missing out on clarifying how the relationship will look, what capabilities are offered, and the level of customer support the business will receive can be a big mistake in determining the best fraud solution.

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Ideally, it’s best to choose a vendor that lets the R&C team choose and guide their strategy. Will the vendor simply provide risk scores? Will they provide indications on fraud, or will they allow teams to do operational work on their platform to perfect fraud efforts? Can the tool ingest their data, or are they given whatever the vendor has to offer?

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All of these are things the organization should consider before buying a fraud prevention solution to get the best results in terms of security, performance, and ease of use (and relations with the vendor).

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Alright, the due diligence and implementation are finished, which should set the Risk and Compliance team up for success. But then the product goes live…

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The program is set, rules are established, and the program is left to run on autopilot. However, the team only leverages a handful of the capabilities they claimed they ‘absolutely needed’ during the buy phase, and now multiple features are sitting unused. Ultimately, any unused feature is money that’s going down the drain.

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It may take a bit of time, but make sure the team understands the ins and outs of the new system, and really puts thought into how they can use the plethora of tools at their disposal.

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Routinely improve processes to maximize efficiency.

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Scaling a Risk and Compliance team is challenging to do effectively; it requires picking the right talent for the job. Hiring the wrong staff can have a significant and long-lasting impact on a company. Without the proper skills, fraud and compliance capabilities will suffer, impacting the company's bottom line.

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If engineers and analysts can’t use the tools at their disposal effectively, Risk and Compliance teams will struggle to optimize fraud prevention operations. Without the right measures in place, fraud losses will occur (and grow unchecked). 

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Compliance leadership should hire professionals that understand the company’s field, market, and niche well, and can deliver adequate protection. Choose professionals that fit right away, or require a short amount of time to onboard.

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Far too often, companies see fraud losses as a cost of doing business; especially new companies looking to grow rapidly. But fraud losses aren’t a ‘cost of doing business,’ it’s criminal activity that loses companies significant revenue.

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This attitude leads to two main problems: there is a failure to adequately report fraud, and it encourages fraudulent activity on the platform as it’s never rooted out or penalized.

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If a company decides to essentially write off the losses as a cost of business, it leads to a lot of fraud going unreported. Not only that, but the fraud is often not being properly tracked and analyzed, so many companies don’t truly understand its impact on the business. They also can’t easily identify common fraud schemes. As companies scale, this only gets harder to keep track of and manage.

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There are other - mostly operational - costs. If fraudsters are calling customer support lines, and spending an average of 30 minutes with each representative, that has a cost that adds up over time. It’s important to look at how these fraud losses add up and explore how to prevent (or at the very least - reduce) these losses.

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Sure, a $5 or $10 fraud loss for a customer may seem insignificant; but if you add multiple 30-minute discussions with customer service over a month, the impact of this fraud on a business can be significant. On top of all that, this leaves legitimate, valued customers waiting in line while these fraudsters take up staff time.

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Now to the second problem; failing to adequately detect, prevent, and protect against fraud encourages criminals to continue carrying out fraud on a platform. Nobody will be caught or penalized, and fraud will continue. Even worse, these fraudsters will only get more adept and successful as they understand the anti-fraud systems they are up against. Even if fraudsters persist, forcing them to change their tactics will help in the fight against fraud.

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Fraud prevention can often seem like a costly endeavor that hinders growth, but it’s important to put security first, keeping not only the company’s platform - but their customers - safe.

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Having a compliance team is necessary for adhering to AML regulations and preventing fraud.

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However, too often, risk and compliance teams are treated as a necessary evil. They are siloed and aren’t properly integrated into the full process of product design and development. Instead, it's best to promote a collaborative risk culture that fosters cooperation during product development.

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It’s true that the cost of compliance can be a hard pill to swallow when looking at the balance sheet, but this perception can have a negative impact on the team’s ability to do their jobs effectively.  Instead of leaving the fraud team to be reactive, it’s best to allow them to be proactive and prepared.

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Risk and Compliance teams are the first line of defense against financial crime for Fintechs and other FIs, and need to be treated like an integral, valued part of the business. Good people bring good culture and experience to the company, ensuring positive outcomes.

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How to Optimize Fraud Practices: Key Takeaways

Here, we’ve covered some of the worst - and most impactful - bad fraud practices. These mistakes can significantly harm the overall performance of a fraud detection and prevention program and should be considered when planning, running and reviewing fraud operations.

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Remember, it’s a work in progress and you’ll constantly need to update your prevention efforts for the best results. Establish a clear operational baseline and identify the metrics that you need to track to qualify your performance. Choose a vendor that offers the features you need, and then actually make sure your team uses all of those features and capabilities effectively. When done properly, you can drastically reduce false positives, mitigating overall fraud losses.

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Build a top-notch team and treat them as an important part of your team. Never treat fraud losses as a ‘cost of doing business,’ and instead, do everything you can to reduce fraud on your platform and limit its impact. Make sure fraud and product teams work closely and collaborate throughout the entire development process.

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