Banking industry in India at the cusp of a revolutionary change, driven by Artificial Intelligence (AI) and Machine Learning (ML): Deloitte India Banking Survey

• 42 percent respondents (cumulative) report having fallen victims to data theft, cybercrime, third-party-induced fraud, bribery, and corruption and fraudulent documentation
• 25 percent respondents foresee an increased dependence on analytical tools for fraud monitoring and detection
• Only half of the survey respondents indicated that they conduct fraud risk assessments and update their fraud risk register once a year

Mumbai, 17 Jan 2022: In the wake of COVID-19 and new digital operations, banking and financial institutions have been struggling to deal with an increasing number of fraud incidents. According to the findings of the Deloitte India Banking Fraud Survey, Edition IV, this trend is expected to continue, with 78 percent respondents stating that frauds could increase over the next two years.

Key reasons identified for the increase in fraud incidents over the next two years include large-scale remote working models, increase in customers using non-branch banking channels and the limited/ineffective use of forensic analytics tools to identify potential red flags.

• Retail banking was identified as a major contributor to fraud incidents, with 53 percent respondents indicating that they had experienced more than 100 fraud incidents (over the last two years)— a 29 percent increase since the previous edition.
• Similarly, the non-retail segment saw an average of 20 fraud incidents, highlighted by 56 percent survey respondents—again, a rise from the previous 22 percent.
• Additionally, data theft, cybercrime, third-party-induced fraud, bribery and corruption, and fraudulent documentation have been identified as the top five concerns with over 42 percent of respondents (cumulative) reporting to be victims of these.

Speaking on the launch of the survey findings KV Karthik, Partner, Financial Advisory, Deloitte India, said, “The impact of the pandemic has resulted in institutions across the globe operating in an entirely new environment. Increase in the use of digital channels for transactions by customers, on one hand, has contributed to the ease and speed of transactions. On the other, with evolving and complex business models and increased use of technology, existing fraud risk management frameworks have been introduced to newer and more complex challenges.”

This has also, inadvertently, created new vulnerabilities for banks and opportunities for fraudsters. Whilst we adjust to the new normal, there will be those who look to exploit gaps and weaknesses in processes and systems. “Reimagining their fraud risk management framework and controls should therefore be a significant priority,” he added.

Outcome of COVID-19 on banks’ fraud risk management function

Survey respondents indicated that the top three outcomes of COVID-19 on their Fraud Risk Management (FRM) function would be increased dependence on analytical tools for fraud monitoring and detection (25 percent), the need to create awareness about fraud amongst customers and employees (23 percent), and a change in the target operating model to enhance capabilities of the remote FRM function (21 percent).

This reflects (in part) in the top three measures taken by banks (over the last six months) to mitigate fraud, with survey respondents highlighting optimising existing Early Warning Signals (EWS) and fraud monitoring systems by using AI/ML and integrating external databases (23 percent), enhancing case management solutions to effectively respond to/report fraud incidents (18 percent), and arranging training/workshops to upskill the staff involved in fraud-monitoring functions (17 percent).

With a constant uptick in transaction volumes, changing patterns in consumer behaviour, and new emerging risks, detecting “red flags” using traditional rule-based solutions have now become obsolete.

“The pandemic has forced banks to enact significant organisational and operational changes within a short timeframe to avoid service interruptions. With myriad changes being deployed at the front end but processes and systems possibly remaining untouched, it begets the question—have all such changes been assessed for their vulnerability to fraud?” said Nishkam Ojha, Partner, Deloitte India.

He added “As new fraud risks start to emerge, financial institutions need to remain vigilant to ensure that they continue to effectively mitigate these risks. Exploring the use of technology can enhance the way banks operate to ensure that they stay on top of preventive, detective, and enforcement measures. The relatively static compliance or policy-centric approach to FRM found in many financial institutions may now be outdated. Today, the industry needs to focus on a dynamic, intelligence-driven approach.”

Other key highlights include:

• Increased reliance on remote and electronic channels has given rise to fraud risks that warrant proactive efforts: Only half of the survey respondents indicated that they conduct fraud risk assessments and update their fraud risk register once a year. With fraud risks such as loan frauds (24 percent), mobile/internet banking frauds (14 percent), identity/data theft (13 percent), and phishing (9 percent) being identified as the top four/biggest concerns facing banks currently, the frequency of fraud risk assessments is severely wanting.
• Stressed assets continue to be an area of concern: Survey respondents have cited limited asset monitoring after disbursement (38 percent), the economic slowdown (24 percent), and insufficient due diligence prior to disbursement (21 percent), as the top three factors leading to higher stressed assets. These suggest that banks may need to overhaul their due-diligence and monitoring frameworks.
• Conducting in-house forensic audits remains challenging: Survey respondents indicated that the top four challenges faced by banks in performing an in-house forensic audit include technological limitations to read and analyse the borrower’s accounting records (26 percent), lack of data analytics capabilities (21 percent), lack of requisite skill sets (20 percent), and lack of a dedicated team (17 percent).
• Synergy across tools and deploying technology (AI/ML) are key to achieving an enhanced FRM function: Survey respondents cited areas such as KYC/anti-money laundering (21 percent), fraud risk assessment (17 percent), and fraud detection (15 percent) would benefit from deploying AI/ML technology. Challenges in effectively implementing EWS/ EFRMS, including the lack of data integrity due to siloed systems making it difficult to identify risks (21 percent) and inadequate data being captured in the system (21 percent), were highlighted by survey respondents.

The need-of-the-hour is for banks to consider an integrated approach that applies the findings of pre-disbursement due diligence to on-going monitoring and identifies anomalies and red flags. The use of advanced technologies such as AI/ML can analyse large amounts of data, filter out false alerts, and identify connections and patterns that are too complex to be picked up by straightforward, rule-based monitoring, or the human eye. This will position financial institutions to respond faster/better and cope with future economic crises with resilience.

Notes to the editor for reference purposes only:
This press release has been issued by Deloitte Touche Tohmatsu India LLP.
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