FinSecure India

Demystifying Fraud to Empower Growth

AUGUST 2024

Foreword

We must approach fraud as we would approach viruses, diseases, or crimes—comprehensively and collaboratively. We need to accept that the problem of fraud is here to stay. It will only evolve with time, and technology alone will not be enough to stop it.

There is currently a gap in how quickly we react to fraud, and a lack of empathy in dealing with the problem. To solve for fraud then, there has to be a social movement combining AI, tech, the community, law, infrastructure, and more. Data Sutram’s call to action is clear: Fraud is not an issue that any single entity can tackle alone. Organisations must invest in the latest technologies, like AI and machine learning, to stay ahead of fraudsters. At the same time, they should commit to industry collaboration, sharing intelligence and adopting best practices. Individuals must stay informed and vigilant, understanding that their role in fraud prevention is crucial. Together, we can create a resilient ecosystem.

This report aims to serve as both a wake-up call and a roadmap for businesses and consumers. It highlights the current landscape of fraud, the potential vulnerabilities in existing systems, and the economic impact of unchecked fraudulent activities. Additionally, the report shares the nature of the problem today, its magnitude, how it will evolve, and why a collaborative approach is essential to solving it. Key insights include the importance of adopting AI-driven fraud detection tools, the need for cross-industry data sharing, and the role of consumer awareness in fraud prevention.

Rajit Bhattacharya
Founder & CEO

About the Report

With nearly 800 online fraud cases reported daily, the impact of financial fraud in India extends beyond monetary losses, eroding consumer trust in digital payment systems. At the juncture where India is fast-embracing digitalisation, addressing the challenges posed by digital fraud has become increasingly urgent for both consumers and financial institutions in India.

In 2023-24, the Reserve Bank of India reported nearly a 5-times increase in digital fraud cases seen in a fiscal year. According to RBI’s Annual Report, card and digital payment fraud cases worth INR 1,457 Cr. were reported in 2023-24. For reference, in the years prior, the fraud reported amounted to INR 155Cr and INR 277 Cr. respectively. That is just calculating internet-based fraud above INR 1.00 Lakh. When we further consider frauds reported below INR 1 Lakh, one RTI response by RBI revealed that the total number of cases increases by 2.70 Lakh, amounting to transactions worth INR 653 Cr.

4.6% of all digital transactions globally are fraudulent, Estimated global losses from digital payment fraud in 2023 is $20 billion.

51% of organisations have experienced fraud in the last two years, with 76% organizations experiencing an increase in financial crime activity in 2023.

The global fraud detection and prevention market size was valued at USD 43.97 billion in 2023 and is projected to grow from USD 52.82 billion in 2024 to USD 255.39 billion by 2032.

2.1 Scope of the Report

Hand in hand with the increase in digital transactions in India, which rose by 24% in value and 53% in volume, fraud incidents have surged, with a 65% increase in payment fraud cases in 2023, leading to financial losses exceeding Rs 1,200 crore. UPI frauds alone constituted around 40% of these incidents, highlighting vulnerabilities in popular digital payment methods.

The rise in digital fraud results in substantial financial losses and undermines consumer trust, with 60% of consumers expressing hesitance to engage in online transactions following high-profile fraud cases. The imperative for banks and financial institutions is not just monetary but also about maintaining public trust in digital financial systems. Therefore, this report proposes viewing digital financial fraud as a social problem. By shifting our perspective from financial loss to social impact, we can consider more bottom-up solutions effective for both top financial institutions and the disenfranchised individual struggling to recover the INR 2000 lost in a phishing scheme.

2.2 Methodology

The report employs a qualitative dominant mixed-methods approach to paint a holistic picture of small-scale financial fraud as a social problem.

• Internal Insights: The report utilizes insights from Data Sutram’s AI-driven platform to detect fraudulent accounts, enhancing understanding of customer behavior and fraud patterns in the Indian financial landscape.
• Literature Review of Secondary Quantitative Data: A comprehensive review of industry reports, academic studies, and regulatory directives provides context on the scale and trends of financial fraud, highlighting key areas of concern across various sectors.
• Qualitative Insights: In-depth interviews with representatives from financial institutions and regulatory bodies reveal challenges and strategies in combating fraud, as well as the social implications of financial crime on consumers.

By employing this approach, the report aims to provide a comprehensive and nuanced understanding of small-scale financial fraud as a social problem, while also offering actionable insights and recommendations for stakeholders to develop effective, collaborative solutions.

Understanding Bank Fraud

3.1 What is bank fraud?

To understand digital fraud with relation to banks, we must take a step back to understand how banks have historically been perceiving financial fraud and their mitigation. Financial Bank Fraud can be categorised into two types:

1. High Value Fraud: Refers to fraudulent activities that result in substantial financial losses, often involving large sums of money.
2. Small Value Fraud: Refers to fraudulent activities that involve relatively small amounts of money compared to high-value fraud. These types of fraud are often more frequent and can affect a larger number of victims, but each individual incident results in minimal financial loss.

High Value Fraud has been existing for as long as financial institutions exist. However, the financial fraud landscape has undergone significant changes in the past decade, driven by advancements in technology, evolving fraud tactics, and increased regulatory scrutiny. Increased digitalisation has resulted in a drastic increase in small value fraud. This exponential increase, largely due to technological advancements, is of immediate interest.

3.2 The Changing Nature of Bank Fraud

To understand what has enabled bank fraud to increase so exponentially in the past few years, it is important to understand the modus operandi of bank fraud in the past few decades.

3.3 Bank Fraud in 2024

Financial fraud is an overlapping concept, with blurred lines on intent, medium, jurisdiction, scale and nature of crime. Therefore, having narrowed down to ‘small-value’ bank fraud, and considering the changing nature of fraud due to evolving technology, we finally land at an intersection of financial fraud that has led to the current media panic, trust deficit and meteoric rise in financial fraud cases.

Key Aspects of Bank Fraud Today
Digital Bank Fraud in 2024 can be broadly defined as any or all fraudulent activities perpetrated by external parties through digital means (eg. emails, websites, malicious software, etc.) with the aim of stealing banking assets or credentials of bank customers.

4 Key Aspects

1. Personalisation of Attack: Relying heavily on fake personas, elaborate ruses and schemes, the root is some form of high-stake social deception and falsification of identities.
2. Remote-Virtual Access: By its nature, bank fraud is committed remotely and/or virtually, relying on the difficulty in authentication over digital media.
3. Internal Stakeholder Facilitation: Either consciously, or inadvertently, internal stakeholders end up facilitating or enabling fraudulent transactions.

Understanding Fraud Solutions

4.1 Profiling Fraudsters

As the nature of fraud continues to evolve, a robust KYC process allows for ongoing monitoring and adaptation to new threats. This proactive approach not only safeguards the financial institution but also builds trust with customers, ensuring a safer and more secure financial environment. The Reserve Bank of India (RBI) has established key KYC rules to mitigate fraud risks, and as of 2023, has added additional amendments to the Master Directions on Fraud.

Effective fraud profiling then requires more data points on top of the existing authentication layers, as well as a triangulation of personal identifiers to be able to build a whole persona of a particular customer. By stockpiling digital footprints, different fraud-prevention solutions aim to actually build an entire digital profile, thereby identifying their authenticity and behaviour.

4.2 Combining Technology & Social Behaviour: Mule Accounts

The Indian banking sector, like many around the world, has been grappling with the issue of mule accounts used for money laundering. Mule accounts are essentially bank accounts that receive funds from illegal activities and then transfer them elsewhere, acting as a bridge in the laundering process. These types of accounts constitute up to 55% of all fraud cases in India. Moreover, industry research suggests, bankers are unaware of 9 out of 10 of the mule accounts in their system.

Case Study: DS Authenticate for Detecting Mule Accounts
Profiling mule accounts, and fraudsters requires multiple layers of data insights and intelligence, and also needs different approaches of combating, alerting and mitigating a possible fraud. Data Sutram has developed a DS Trust Score as part of its product, DS Authenticate. The DS Trust Score runs from 0 to 1000, lower the score, higher the chances of the identity being a fraudulent one.

4.3 Digital Fraud VS Digital Growth, How to Strike a Balance?

The Basel Committee on Banking Supervision draws up a graphical illustration of how digital growth and financial fraud share an intrinsic relationship. The challenge for policymakers lies in striking the right balance between the benefits of digitalization in banking and the risks of digital fraud.

5. How can we Solve for Fraud?

5.1 The Technological Angle

Fraud-solving technology leverages three key elements: Digital Public Infrastructure (DPI), Artificial Intelligence (AI), and scalable affordability.

5.2 The Regulatory Imperative

Regulation plays a crucial role in combating fraud by establishing frameworks that promote accountability, transparency, and compliance among financial institutions.

5.3 Financial Literacy

Financial literacy is essential in mitigating fraud, especially as digital transactions become more prevalent.

5.4 Profit Motivations: Why are VCs looking at fraud as a big market?

The fraud detection and prevention market is experiencing significant growth, projected to expand significantly in the coming years as the necessity for effective solutions increases.

Roadmap to Building a Financially Inclusive and Safe Future for All

It’s clear that no single entity—be it a company, industry, technology provider, or government—can tackle the intricate issue of financial crime in isolation. This presents a unique opportunity for collaboration in developing a comprehensive framework and establishing shared benchmarks for successful anti-financial crime initiatives.

References

1. "Beware: 800 Online Financial Frauds a Day." The Times of India, 2024
2. PricewaterhouseCoopers. Platform fraud: the new frontier of economic crime. PwC, 2023
3. NASDAQ Report
4. Reserve Bank of India and various financial reports