When is the best time to invest in fraud protection?

Open Finance describes the ability to access and utilize financial information in real time. This helps personalize transactions and is complemented by Open Banking. Despite the apparent similarities, the difference between Open Banking and Open Finance concepts lie in their scope. Open Finance includes the sharing of data for any financial experience, while Open Banking focuses on personal finance and retail.

In September 2023 GFT released a U.S. Banking Disruption Index measuring consumer activity and sentiment within the banking sector. In this survey, 46% of Americans did not have any knowledge of Open Banking nor about its benefits, while 21% claimed that they had heard of the Open Banking concept, but not about its benefits. The lack of awareness is an issue that financial institutions will need to fix—consumers and institutions alike can only benefit from an Open Banking education, because most U.S. banks already work on an Open Banking model.

With 30% of American consumers indicating that the ability to make and receive instant payments is an important factor when placing trust in their banks, financial institutions can leverage informative resources for Open Finance to advertise their API-built systems and inspire trust within their clients.

Open Finance not only shapes the way that we use and share data, but also the relationship that consumers have with currency, banks and transactions. As API-based systems and Open Finance principles advance, they alter traditional banking practices in order to provide a customized and seamless customer experience. The APIs that Open Finance are built upon, enable consumers to share their financial data with third parties, which in turn, allow third-party companies to create products that cater to a consumer’s specific needs.

This technology also has the power to contribute to sustainability measures, which is becoming an increasingly important decision-making factor for consumers. Customers want to interact with companies that share their values and seek out organizations that prioritize innovation to offer cutting-edge products and services, as demonstrated with the rise of digital banking.

While Open Finance has the potential to upgrade and transform many aspects of the lives of consumers, it also comes with an additional responsibility for banks—fraud protection. With respect to finance, Americans seem more open to sharing their information. The U.S. have not defined Open Banking regulations like other countries, and because of this, consumers are more exposed to fraud schemes.

Though security and risk management are the foundations of highly effective technology solutions, some technology just isn’t as safe as the global standard. Without a reliable implementation partner, banks may unintentionally expose consumers to risk.

For example, screen scraping apps prompt consumers to share data in an unsafe way. This method is based on Open Banking, but it is not safe, the sole reason why other countries do not allow it. When using this type of application, consumers provide consent to receive banking information, but this exchange can easily be hacked. The risk of fraud also increases with the number of transactions, as it offers more opportunities for scams.

When fraud occurs, customers must open a case with their bank, which can be a lengthy process. Perhaps this is the reason that 51% of consumers within the U.S. prioritize fraud protection when choosing a bank. This appears to indicate that customers are more concerned with bad experiences, rather than benefits. Banks also recognize this concern, and thus place fraud protection as a top priority.

While technology like mobile banking apps and portable point-of-sale systems are a necessary advancement in the retail and banking industries, they also increase the likelihood of digital crime. This is one reason why we’re seeing an increase in cybercrime and fraud. How can companies combat increasing fraud while moving forward with digitalization? We become more proactive. The key to offering quality fraud protection to consumers is by mastering fraud prevention.

Consider instant payments as an example. There is a scam that uses malware to prompt consumers to update a familiar app. Once they accept the update, malware can steal the information of users. Many consumers store their credit cards or even checking account numbers on apps they use to make purchases, which enable financial fraud.

Cases of fraud, such as these, happen so often that by the time that banks have a solution to fight one form of fraud, another occurs. It is not uncommon for legacy and on-premise banking systems to be behind in cybersecurity, which is why digitalization should be a top priority for banks. It is vital to partner with a digital transformation company that has use cases in the banking industry and is ready to be proactive about fraud protection. This step not only equips financial institutions with the tools that they need to protect an organization’s data, but it also displays to consumers the importance of offering premium services.

GFT’s Banking Disruption Index shows that 62% of Americans are not looking to switch their main banking providers. This research shows that customers are neutral regarding their banking experience because there are not a lot of similarities between banks. Financial institutions looking to grow their customer base can still leverage this information to appeal to these consumers. They want cutting-edge services and to trust their bank to protect them from fraud—and with digital transformation, banks can fulfill these consumer needs.

Banks won’t be able to provide any differentiator if they’re not using technology. Even without reviewing use cases, banks need to invest in digitalization and become trailblazers of the industry to gain the attention and business of consumers. Banks will be able to gain two main advantages: a way to combat fraud and a channel to provide cheaper products.

For fraud, instant payment transactions are so fast that it can be difficult to detect fraud in real time. Banks do have fraud models, which the Federal Reserve (FedNow’s inventors) can follow as more participants opt to use the system. This is important because the Federal Reserve may be a key player in fraud protection cases due to the centralized database from which it operates. It can refine this data to provide information for the banks in real-time and send alerts for common fraud behaviors.

AI will also play a large role in fraud protection and prevention. This technology can automate tasks and operate in real-time, meaning banks can use AI to reach the fraud models and detect abnormalities. Detecting fraud as soon as possible is paramount and AI is the perfect tool for the task.

The other solution for banks is platform modernization, a process that transforms an organization's legacy system to a modern, efficient and secure system. For this system, GFT recommends an API model, which stays flexible and scalable. Platform modernization requires data migration and the construction of new architectures. Once it is up and running, it is a cost-effective system that can reduce time-to-market for products, which means that banks can quickly release updates to follow or anticipate consumer trends.

Another important aspect of platform modernization is that banks that move to the cloud can leverage the most modern cybersecurity solutions provided by the cloud provider as a native feature of its infrastructure. This can be a leapfrog for banks in fraud detection and in providing faster near real-time protection to their customers.

What is even better is that with this type of system, GFT can integrate other industry tools into our clients’ platforms. For example, AI Impact uses AI to fast-track the process of platform modernization and support software development. We can also leverage our partnerships with banking solution platforms such as Thought Machine.

Open Finance is the future of banking and with all of its great features, we must also prepare for the downsides—increased fraud. Consumers want the best of both worlds with new, innovative banking features and traditional protections against fraud. Fortunately, there is a way to deliver both through digital transformation.