Preventing Financial Fraud in the Age of Digital Banking: Best Practices

We know why we love digital banking. It fits into the modern lifestyle of convenience and speed. We send and receive money from any part of the world with a couple of clicks and everyone is happy. Well, not exactly. 

Right in the same bag with convenience and speed is fraud. The very nature of electronic banking exposes it to many online sharp practices; you can have all your money wiped with a few clicks. Call it a two-edged sword. 

This bitter-sweet experience can be likened to having both sugar and sour grapes in your mouth. You either swallow or spew both. One way out is to reduce how much of the bitter part you swallow. And that’s what financial fraud prevention is about. This piece highlights the best practices in preventing fraud in the electronic banking age.  

Why is fraud detection for banking important

Fraud detection for banking is the way to go for one major reason – prevention is better than cure. You really don’t want to face the consequences of not preventing fraud in your organization. It can lead to huge financial losses, bankruptcy, ruined reputation, ill health and even loss of lives. 

Preventing these sharp practices benefits every stakeholder – banks, customers, organizations and governments. That’s why a holistic approach is recommended to attack this menace from all angles. 

What is financial fraud


To prevent fraud, we must first have a good grasp of what it is. It is any kind of illegal, deceptive and fraudulent activity that robs you of money. Monetary fraud is a deliberate action aimed at having illegal gains and denying victims their rights. 

Fraud can be committed by one or more individuals. Some criminals even create companies for the sole purpose of defrauding people. There are several types of monetary fraud. Some are listed below:

  • Credit card fraud
  • Wire fraud
  • Securities fraud
  • Tax fraud
  • Bankruptcy fraud

4 forms of digital banking fraud

Online banking exposes both banks and customers to high-level risks. To manage these risks, everyone involved must be aware of the forms of fraud committed in the digital banking industry. Four of these frauds are listed below.

  1. Malware

Malicious software is a form of fraud that involves the criminal using an intrusive software to gain unauthorized access to the victim’s computer with the aim of stealing data or damaging the computer system. Examples of malware are:

  • Worms
  • Viruses
  • Ransomware
  • Spyware
  • Adware

In digital banking fraud, a cybercriminal gains access to their victim’s computer through malware and spies on the keys they press or monitors the traffic on their computer. This information is then used on the victim’s banking app to commit fraud.

Also, the hacker can hijack a browsing session and divert the traffic to a fraudulent URL that looks like the victim’s  banking app. The unsuspecting user types their username and password and the cyber crooks use the information for fraud. 

  1. Phishing

Phishing is another cyber sharp practice used to carry out financial fraud. In phishing, a cybercriminal contacts their victim through email, text messages or phone, posing to be their financial institution or bank. 

The crook may tell the victim that their bank account is problematic and needs to be updated. Unknowingly, the innocent victim then discloses sensitive details that are used to steal funds from their bank accounts. Phishing is a cause of concern for organizations, as 31% of companies have users who fall for this attack. 

  1. Identity theft

Identity theft occurs when a criminal uses someone else’s credentials to open a bank account and take credit loans without paying them back. To erase any suspicion, these lawbreakers imitate their victim’s digital footprints. These crooks can also launder stolen money with other people’s identities and the victims will be none the wiser.

  1. Sim cloning

Sim cloning simply means duplicating someone’s sim. In online banking fraud, it is used by cyber crooks to intercept SMS messages from the victim’s bank. Often, banks send messages to their customers’ phones as a 2-factor authentication measure. Cybercriminals get these messages and use the information to defraud customers. 

With a sim clone, a hacker can send and receive messages, listen to calls, make calls and track their victim’s location. The bank and the customer can be unaware of a sim clone for a long time until the customer starts seeing strange transactions. 

7 best practices in financial fraud prevention

No one takes a knife to a gunfight and expects to win. Stopping determined and digitally sophisticated criminals from defrauding you and your customers is no child’s play. Therefore, to successfully battle online banking fraud, you must attack with your arsenal from all fronts. The following are time-tested practices that help in fraud prevention.

  1. Awareness of forms of fraud

The first step in combating banking fraud in online banking is for everyone involved to be aware of these frauds. Ignorance is never an excuse, especially as there is enough information online about cyber crooks and their operations. Knowing what crimes exist in the cyber space and how they are implemented will help fortify the industry. 

Banks and other financial institutions must educate their clients on the common types of cyber fraud and how to avoid them. Likewise, bank staff must be trained to recognize and handle  fraudulent transactions

  1. Investment in fraud monitoring and prevention technology

Fraud monitoring technology combines systems, machine learning, artificial intelligence and other cybersecurity tools to recognize and prevent fraud. Every company, especially financial institutions and eCommerce companies, should make this investment to be several steps ahead of cybercriminals. With the system in place, unusual activities are quickly detected to prevent fraud. 

  1. Use of challenge questions and 2FA

Banks and other financial institutions should incorporate challenge questions and 2-factor authentication in their registration processes. This will make it tougher for hackers to have their way. Challenge questions require the hacker to know private information about the account owner, and this will be hard to crack for a hacker that’s not related to the customer. 

  1. Use of longer and more complex passwords

The shorter and simpler a password, the easier it would be to decode. That’s why you should advise your customers to use longer and more complicated passwords. Many online platforms already have minimum password characters as well as suggestions on how to make them more difficult for hackers to crack. This helps a lot in preventing online monetary fraud

  1. Penetration tests


Penetration tests are done by hired hackers whose job is to try and breach your security system, using tested techniques. It’s like a role play. The hired hackers pretend to be real hackers and deploy all known tactics to break your defenses. 

These tests detect vulnerabilities in your system’s defense so that they can be fixed. Penetration tests fortify your security system’s defense and prepare your IT team to respond to threats. 

  1. Vigilance against internal fraud

Don’t be so carried away with tackling external crooks that you forget that insiders can also carry digital fraud. Bank staff have easy access to customers’ financial details and can defraud these customers smoothly. Some bank staff members have been known to sell this information to crooks who execute the fraud. 

This precaution is not limited to banks. Every organization that handles financial transactions or sensitive customers data should be cautious. A structure should be put in place to screen and audit employees periodically as a measure against internal fraud. Also, a good fraud monitoring technology allows companies to monitor both clients and staff. 

  1. Timely response to suspicious activities

Response time makes a world of difference in preventing digital banking fraud. For example, raising an immediate alarm on sighting a strange transaction or customer behavior by a bank staff, can prevent a cybercriminal from carrying out fraud. In online financial fraud, a lot can happen in a few minutes, and the earlier the right authorities respond to threats, the better.

To stop the hack, you need the knack

Online banking has come to stay and cyber crooks will always try their luck. It’s up to you to be several steps ahead of them. This might look like a herculean task, but if you employ fraud prevention best practices, you’ll be fine. 

You must first know the forms of fraud in the banking industry to be able to tackle them. These frauds include malware, phishing, identity theft and sim cloning. 

To prevent financial fraud, invest in fraud monitoring technology, use 2FA and challenge questions, encourage your customers to use longer and complex passwords, carry out penetration tests, be vigilant to internal fraud and respond to suspicious activities on time. 


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