Home Finance How to Use AI in Fraud Detection in the Financial Sector

How to Use AI in Fraud Detection in the Financial Sector

AI fraud detection in the financial market

How did you feel when you first heard a fire alarm? Did the fire alarm system play a significant role in helping you escape the blaze?

Similarly, evil actors in the financial sector have developed fire-like strategies to steal financial assets.  According to IBM, the global economy lost about $4.45 million to fraud in 2023. Today, Advanced technology makes it easier for scammers to engage in several financial crimes. How would the financial industry operate if fraud can be detected and prevented, like a fire alarm system?

In today’s article, you will learn how to use AI in spotting, stopping, and monitoring financial fraud both in the United States and globally.

According to statistics from Onfido.com, identity cards are the target of about 46.3% of document frauds. Fraudsters impersonate others through their credentials, bank PINs, and certificates to carry out illegal actions like cash withdrawals. The personal information obtained from victims is used to; 

  • Create a bank account
  • Apply for an online credit loan
  • Request official documents
  • Money laundering 
  • Invest in illegal goods

How Does AI Come into the Picture of Identity Frauds?

Artificial intelligence tools can detect identity fraud by analyzing a person’s transactional behavior. The AI system keeps track of the activities connected to ID cards such as a person’s spending, including the things bought, the quantity, and the time frame. 

AI systems can recognize changes in an individual’s pattern by data monitoring and analysis. For instance, an AI system can spot unusual withdrawals, new credit cards, mistakes on credit reports, large deposits, and unexpected bills.

In addition to transaction data, AI-powered applications frequently follow an individual’s activities by monitoring their social media and work history. 

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Most cryptocurrency exchanges in decentralized financial systems use advanced AI-powered procedures like KYC (Know Your Customer). This method allows only users with a verified identity card to perform financial-related activities on the app. Binance and other cryptocurrency exchanges alert traders to unusual withdrawals, logins, or trading. So, How does AI prevent identity fraud?

Below are the techniques AI uses to prevent identity fraud:

  • Identification and confirmation of data
  • ID authorization and verification
  • Biometric Verification

What Are the Advantages of Employing AI to Prevent Identity Fraud?

The advantages of using AI in fraud detection in the financial market can never be overemphasized. Below are the various benefits of utilizing AI in preventing identity fraud:

  • It maintains an individual’s privacy.
  • It enhances brand integrity.
  • It reduces the possibility of identity fraud and the associated consequences. 
  • AI offers an automatic and quicker response to identity fraud.

Are entrepreneurs ready to integrate AI into the financial system? The second popular application of AI in fraud detection is phishing bot attacks. According to AAG IT,  80% of UK organizations confirm that phishing was the primary cause behind most cyberattacks in 2022.

This fraud scheme involves building an online platform to impersonate a company or a person aimed at committing fraud. An example of a phishing attack is the recent Kraken Crypto Exchange incident of a $8.35 million loss in USDT. About 1,160 Australian customers were affected.

What are the tools used by hackers in plotting this attack? Emails, social media accounts, random website links, and online organizations or communities are all used in this notorious plot.

How Does AI Discover Phishing Sites Across Several Platforms?

AI algorithms examine interpersonal conversations on social media and identify unusual communication patterns. The study reveals a person’s word choice, areas of interest, writing style, and preferred websites. An example of a method AI uses to spot phishing attacks is a Natural language processing (NLP) analysis of text patterns.

AI systems analyze IP addresses, emails, and social activity to detect phishing scams. Because emails are the primary medium for most phishing attacks, AI examines emails to discover;

  • An unusual tone of urgency in financial advice
  • Strange wording or tone in the text
  • Request for private information, such as bank account data
  • Links that lead to harmful websites
  • Odd email attachments

What If These Phishing Attempts Were Visual?

To detect fake images on websites or emails, AI systems employ a Convolutional Neural Network (CNN). 

Why is the use of Convolutional Neural Network important? This is because hackers alter photos taken from legitimate websites and post them on phishing sites. Although this may look authentic to regular website visitors, AI does not see it that way. 

What happens after these pictures are detected by AI? The AI system prompts the user to leave the website or email or logs them out of the site automatically. A blacklist with fraudulent IP addresses and URLs is the last technique AI systems employ to identify phishing attacks.

When an internet user identifies a reputable website, the AI system also updates the whitelisted websites automatically using machine learning.

What are the top companies using AI technologies in fraud detection in the financial industry? CrowdStrike, Blue Hexagon, Darktrace, and other cybersecurity firms specialize in offering AI technologies to combat phishing attempts. Here are some other disruptive AI-powered companies to watch out for.

What Are the Advantages of AI Detection of Phishing Attacks?

  • It safeguards user privacy
  • It safeguards consumers’ wealth and private information
  • It safeguards the device from hacking
  • It raises user trust and domain authority for a brand

Although no one can foresee with certainty how AI will impact the financial industry in the future, individuals and companies have been able to develop these strategies to guard against data loss and manipulations.

Additionally, individuals can apply AI in ways like:

  • Businesses can analyze customers’ reviews and messages using AI detection systems.
  • Hiring of qualified programmers who can decipher security codes from AI detection systems.

Potential Risks of AI in Fraud Detection

Many individuals worry about the possibility of their personal information being exposed due to hacking into AI fraud detection systems. Today, some people consider social media surveillance to be a privacy breach. 

Since data analysts and programmers formerly filled these positions, employing AI would result in fewer job prospects. However, having these trending skills will make you more valuable to employers.

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Final Thoughts

Will AI lower the risks of financial fraud? IBM estimates that businesses currently using AI fraud detection schemes saved $1.8 million in costs associated with data breaches. AI aids in data scanning, log management, detecting unsafe websites, and effectively detecting fraud. 

With the help of organizations like QRadar EDR,  analysts can identify emerging dangers and internet patterns. Like the fire alarm system discussed earlier, these AI-powered products have helped around 28% of businesses that use AI for fraud detection. 

Will AI lower the chances of financial fraud? Definitely!


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Naomi Ndukwe is a social media manager, blockchain content writer and a contributor at EntrepreneurBusinessBlog.com. Naomi covers the AI, web3, Fintech and digital technology categories of our blog. You can connect with her via email, [email protected].


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