June 05, 2023

The Top 5 Fraud Trends Impacting Banks and How AI & Machine Learning Are Shaping the Fight

The Top 5 Fraud Trends Impacting Banks and How AI & Machine Learning Are Shaping the Fight

In the digitized world of the 21st century, the financial services industry faces a growing challenge: fraud. With technological advancement comes sophistication in fraudulent practices, leading to an escalating cycle that banks have to continually combat. As they adapt and evolve, here are the five biggest fraud trends impacting banks today and how artificial intelligence (AI) and machine learning (ML) are being utilized to stay ahead.

1. Identity Theft and Synthetic Identity Fraud

Identity theft remains a persistent problem for financial institutions, with incidents on the rise. This form of fraud involves stealing someone’s personal information to apply for credit, make unauthorized transactions, or even create entire bank accounts. A recent example involved a sophisticated ring of cybercriminals pilfering personal information from data breaches to apply for unemployment benefits across multiple states during the pandemic, causing a whopping $36 billion in losses.


Adding to the complexity is the surge in synthetic identity fraud. Here, fraudsters concoct entirely new identities using a mix of real and fictitious information. These synthetic identities are then used to open fraudulent accounts or take on credit, making detection significantly more challenging. For instance, a fraudster could combine a real social security number with a made-up name and address, thus creating a ‘synthetic’ identity that can bypass traditional fraud detection methods.

2. Account Takeover Fraud

Account takeover fraud represents a severe concern in the digital banking landscape. In this scheme, cybercriminals gain unauthorized access to a customer’s account, often by stealing login credentials via phishing attacks or using information from data breaches. They then drain the account, make unauthorized purchases, or even take out loans. For example, in 2020, a group of fraudsters carried out a massive account takeover scheme by exploiting a vulnerability in a popular mobile banking app, resulting in losses amounting to millions of dollars.

3. Payment Fraud

The growth of online transactions has unfortunately been accompanied by an increase in payment fraud, encompassing credit card fraud, wire transfer fraud, and new account fraud. Cybercriminals have developed advanced techniques to infiltrate systems, intercept transactions, and trick consumers into making unauthorized payments. A notorious case involved a gang using malware to manipulate bank systems, allowing them to replicate credit cards and drain ATMs across multiple countries, netting over a billion dollars.

4. Insider Fraud

While external threats dominate the headlines, banks also face considerable internal threats. Insider fraud occurs when an employee misuses their position to steal money, data, or other assets. This fraud form is particularly challenging to detect as it involves individuals with intimate knowledge of the system’s operations and security measures. A notable case involved an employee of a large multinational bank who embezzled millions over several years, utilizing their understanding of the bank’s procedures to avoid detection.

5. Phishing Scams and Social Engineering

Phishing scams continue to be a prevalent problem for banks. These scams trick individuals into revealing sensitive information, often by posing as a trusted entity via deceptive emails, texts, or websites. Coupled with social engineering, where fraudsters manipulate individuals into divulging confidential information or performing actions that compromise security, this form of fraud has become increasingly sophisticated. One infamous example involved an elaborate scam where fraudsters impersonated the CEO of a French conglomerate via a series of emails and phone calls, successfully tricking the company’s employees into transferring millions of dollars.


Now, how can financial institutions stay ahead of these trends? The answer lies in leveraging the power of AI and ML technologies.

AI and ML: A New Era in Fraud Detection and Prevention

Artificial intelligence and machine learning technologies are revolutionizing the way banks identify and combat fraud. By providing predictive insights and real-time analysis, AI and ML are becoming critical components of fraud detection systems.

Harnessing Pattern Recognition

AI algorithms excel in identifying patterns and anomalies in large data sets, an ability crucial in spotting potential fraud. By analyzing transactions in real time, AI can pinpoint unusual behavior, flagging potential fraud for further investigation.

Mitigating False Positives

AI and ML models can learn and adapt over time. They can distinguish between false positives and actual fraud, minimizing unnecessary alerts and focusing on real threats, ultimately leading to an improved customer experience.

Proactive Fraud Prevention

Traditional fraud detection methods often involve responding to fraud after it occurs. In contrast, AI and ML can predict potential security threats before they happen. They provide a proactive approach to fraud prevention, allowing banks to stay one step ahead of fraudsters.

Risk Scoring

AI and ML are instrumental in risk scoring. These technologies analyze a wide range of data to determine the likelihood of fraud, helping banks make informed decisions on whether to allow transactions.

Alternative Data

Alternative data refers to data derived from non-traditional sources, such as social media activity or transaction history, which can provide additional insights into user behavior and risk. By utilizing AI and ML, banks can analyze this alternative data to enhance fraud detection capabilities.


Despite the promising benefits of AI and ML, implementing these technologies requires significant expertise and resources. It is here that companies like 1datapipe can support financial institutions in their journey towards robust fraud detection and prevention systems.


1datapipe’s Living Identity API provides an innovative solution to harness alternative data effectively. It aggregates and analyzes alternative data, generating dynamic and accurate risk scores, which help banks identify fraud and validate identities in real time. The Living Identity API enables financial institutions to stay ahead of evolving fraud trends, reduce false positives, and improve their risk management, all while promoting financial inclusion.


In today’s era, saying yes to more good customers while keeping fraudsters at bay is a delicate balance. But with the right technological partners and innovative solutions, financial institutions can turn this challenge into an opportunity.


If your financial institution is grappling with fraud trends and looking for innovative ways to combat them, it’s time to explore 1datapipe’s solutions. Let’s work together to redefine your approach to fraud detection and prevention and create a safer, more inclusive financial ecosystem. Get in touch with 1datapipe to learn more.