Strengthening digital banks against fraud: Best practices for the industry

Digital banks have levelled up finance with their unmatched speed and convenience, but this agility also makes them prime targets for fraudsters. Authorised push payment (APP) fraud is on the rise, with losses hitting £580 million in the first half of 2023, according to UK Finance. The very features that make digital banking appealing—fast, online-only services—also expose critical weaknesses.

But these challenges create an opportunity. By strengthening fraud defences, digital banks can protect customers while building trust and gaining a competitive edge in the market.

In this blog, we’ll look at the key risks digital banks face, how to balance security with a smooth customer experience, and the role of data quality in improving fraud prevention.

A breakdown: Challenges and learning opportunities

Digital banks are particularly exposed to fraud due to the very qualities that make them popular: speed, convenience, and minimal friction for the customer. Instant account setups, real-time transactions, and simplified onboarding processes are essential to the user experience, but these same elements make it easier for fraudsters to exploit vulnerabilities.

Let’s look at some of the challenges and best practices to work around them:

Challenge: Speed and convenience make digital banks vulnerable to fraud.

• 💡Learning opportunity: Advanced transaction monitoring can address this vulnerability by using AI and predictive analytics to detect suspicious patterns in real-time. Digital banks can still offer the speed and convenience customers expect, but with the added layer of security that detects fraud before it escalates.

Challenge: Rise of APP fraud exploits rapid transactions and online-only interactions.

• 💡Learning opportunity: By implementing multi-layered, data-enriched identity verification, digital banks can secure transactions and prevent fraudsters from tricking customers into authorising fraudulent payments. This ensures that despite the rapid, online-only nature of digital banking, each transaction undergoes thorough scrutiny without impacting the customer experience.

Challenge: Reliance on digital-only verification methods increases fraud risk.

• 💡Learning opportunity: Collaboration with CRAs and alternative data providers allows digital banks to supplement their digital verification processes with more comprehensive, accurate data. This helps in identifying fraudulent activity earlier, closing the gaps that digital-only methods might leave open.

To sum up: By leveraging high-quality data, advanced technology, and industry partnerships, digital banks can turn vulnerability into resilience—protecting their customers and building long-term trust.

Addressing these challenges requires a comprehensive approach that improves security and maintains a seamless customer experience.

Balancing security and customer experience

Maintaining customer trust hinges on the ability to strike a delicate balance between robust security and a seamless user experience. Customers want the convenience of fast, efficient services, but at the same time, they expect their bank to protect them from fraud. Too many security barriers can frustrate users and lead to friction, while lax security measures can lead to breaches and loss of trust. Finding the right balance is key. We’ve interviewed financial crime industry thought leader, Ashley Beldham, to capture ways to achieve this:

Best practices:

#1. Transaction monitoring:
Automated, real-time monitoring is essential for detecting anomalies without disrupting legitimate transactions. By employing AI-driven analytics, digital banks can flag suspicious activity instantly, ensuring that fraudulent attempts are blocked while genuine transactions proceed smoothly. This approach minimises delays for customers while maintaining strong security.

#2. Personalised security measures:
A one-size-fits-all approach to security is no longer enough. By tailoring security protocols based on individual customer behaviour, digital banks can offer a more personalised experience. For example, customers with consistent transaction patterns can benefit from fast-tracked security measures, while those exhibiting unusual activity can be subject to more stringent checks. This reduces friction for low-risk customers and focuses resources on high-risk situations.

#3. Behavioural biometrics:

Integrating behavioural biometrics, such as typing patterns, navigation habits, and device usage, can add an extra layer of security. This approach detects unusual customer behaviour, even when credentials are stolen, reducing reliance on passwords alone.

#4. Customer education:

Raising awareness about fraud tactics, like phishing and social engineering, empowers customers to spot and avoid scams. Digital banks should consider regular alerts and educational resources to keep clients informed.

#5. Cross-bank collaboration:

Collaboration among banks for shared intelligence on emerging fraud trends can help digital banks respond faster to threats. Shared databases of fraudsters or flagged transactions would allow banks to improve fraud detection collectively.

#6. Adaptive authentication:

Adaptive authentication adjusts security requirements based on transaction risk. For example, low-risk actions proceed smoothly, while high-risk ones may prompt additional verification. This balance keeps most experiences seamless without sacrificing security.

#7. Regular audits and testing:

Periodic testing of fraud prevention systems, such as penetration testing and red teaming, helps digital banks uncover vulnerabilities and stay ahead of evolving threats.

#8. Machine Learning feedback loops:

Implementing a feedback loop for machine learning models used in fraud detection ensures the system learns from false positives and actual fraud cases, improving accuracy over time.

#9. Regulatory compliance and reporting:

Digital banks should ensure their fraud prevention measures comply with regulations, like PSD2 in Europe, which mandates strong customer authentication. Reporting requirements should also be met to maintain transparency and trust.

On top of this, data quality plays a key role. High-quality data is the foundation of both security and user satisfaction. By leveraging clean, accurate, and comprehensive data, digital banks can make real-time decisions that protect customers without sacrificing speed or convenience. With reliable data, fraud detection becomes faster and more precise, allowing digital banks to personalise security protocols and reduce the risk of false positives. Ultimately, this ensures that customers can enjoy the seamless experience they expect while feeling confident that their accounts are secure.

Let’s delve into data quality a little more…

How data integration improves fraud prevention

Fraud prevention in digital banking hinges on having a full, accurate picture of customer behaviour. By integrating data from credit reference agencies (CRAs) and alternative data providers, banks can build a more holistic view of their customers. This integration enables early detection of f

raud by identifying unusual patterns or behaviours that might otherwise go unnoticed. With access to diverse and comprehensive data sources, digital banks can respond faster to potential threats and prevent significant financial losses.

And that’s why data benchmarking is so important. It allows you compare the quality and pricing of data from different sources so that banks identify the most reliable and cost-effective sources of bureau data to fuel their fraud prevention systems.

The future of fraud prevention

As financial crime becomes increasingly sophisticated, digital banks must remain proactive in refining their fraud detection systems. The ability to access and integrate high-quality data from multiple sources will be key to staying ahead of emerging threats. By leveraging comprehensive data, digital banks can protect their customers, reduce financial losses, and safeguard their reputations in an industry where trust is paramount.