5 precautions banks can take to avoid fraud

An additional layer of preventative actions that financial institutions and banks can incorporate is the analysis of the financial models of the entity or the individual.

Banks and credit institutions have been the recipients of defaults and credit fraud for many decades, and it has become even more difficult today. With the increase in digitization, the scope of fraudulent activity has increased further, as due diligence procedures have not kept pace with the rapid development of technologies and their subsequent misuse.

It has become essential for financial institutions to intensify their due diligence methods to limit financial losses due to incorrect integration of accounts receivable. Several technology-based fraud detection services tailored for the BFSI industry have emerged in recent years. However, the industry itself is slowly moving towards digitization and optimization of digital services. To limit the damage caused by fraudulent activity, banks need to embrace digitalization and make sure the right collateral is in place.

Let’s review five key preventative measures Indian banks can take to avoid fraud, from pre-registration to collection. There are several stages of the customer journey where timely checks and preventative measures can significantly reduce fraud.

One of the most important precautions a bank can take to prevent fraud is integrate emerging technologies in their systems. Many traditional banks have yet to take advantage of the digital revolution in the country. Obtaining and submitting false documents is not as difficult as it was 5 years ago, and the number of such requests has only increased. Digital verification of documentation through integrated technology is an essential step towards fraud prevention. The integration of technology based on artificial intelligence and machine learning has been a game-changer for businesses around the world, and the banking industry will only benefit from their adoption into their systems.

Once the documents have been verified to be genuine and original, we take the next step in fraud prevention – due diligence. Due diligence covers many aspects that should be considered before granting loans to individuals or business entities. In this context, the first preventive measure that banks can adopt is to filter candidates’ public files, thus ensuring their solvency. There are several sources, government-verified, to assess credit history, employee information, and other details that can help assess their financial situation and, therefore, their creditworthiness. All this must of course be done without compromising the security and confidentiality of the candidates.

An additional layer of preventative actions that financial institutions and banks can incorporate is the analysis of the financial trends of the entity or individual. Tax returns, whether they are RTI or GST returns, are a good indicator of the business health and validity of an entity. The lack of GST or RTI data is a source of concern for any lending institution, as it can be an indicator of intent or fraudulent activity. In this case, the next preventative measure that banks can take is to filter entities for any negative news which could have been published within a given time frame against the plaintiff. News agencies are a good source of information for banks to assess the validity of applicants. In this case, no news is good news and one can move on to the next stage of due diligence, but negative news signals concerns, requiring further analysis of the financial and business health of the applicant.

Finally, banks should take advantage of advances in AI & ML technology, to preemptively analyze models and learn from historical cases. Embedding technology into banking processes, without meaningful interpretation and analysis of the data collected through them over time, is a sub-optimal use of this particular resource. Banking institutions should ideally create or integrate advanced models that help predict future fraud cases in order to proactively detect irregularities and eliminate suspicious applicants. Additionally, keeping track of announcements, updates, and listings released by regulators such as SFIO and SEBI also helps banks put controls in place to prevent fraudulent activity.

It should, at this point, be understood that despite the fact that all preventive checks have been made against an application, there is always a chance that the applicant is likely to be fraudulent, as no process is foolproof. However, with the measure listed above, the likelihood of onboarding a fraudulent customer is significantly reduced!

(By Omkar Shirhatti, Co-Founder and CEO, Karza Technologies)

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