Banks lag Criminals in Tech Race, RedCompass Labs Finds

A new industry survey by RedCompass Labs, a provider of financial crime detection solutions, has revealed that banks are falling behind in the technological arms race against increasingly sophisticated financial criminals. 

The study of 300 senior payments professionals at US banks highlights significant challenges in the sector's ability to keep pace with rapidly evolving financial crime threats.

The survey found that banks estimate they are lagging an average of 8.2 months behind criminals in adopting and leveraging new technologies for financial crime detection and prevention. 

This gap widens significantly for some institutions, with a quarter of smaller banks estimating criminals are just 2-3 months ahead. In contrast, some larger institutions fear the gap could be as wide as 23 months.

Despite this lag, 75% of banks surveyed expressed confidence they can eventually close this gap. However, experts warn this optimism may be misplaced given current detection rates.

This is because banks are grappling with a proliferation of both established and emerging financial crime threats. 

Human trafficking-related crimes topped the list of threat priorities, with 31% of banks focusing on detecting commercial-front brothels used to conceal exploitation.

Other key priorities include combating people smuggling (30%) and labour trafficking (30%). Larger banks showed a stronger focus on labour trafficking (39%) and elder financial abuse (39%).

Notably, ‘pig butchering’ scams - a relatively new form of cryptocurrency investment fraud often perpetrated by human trafficking victims themselves - ranked on par with drug trafficking as a key concern for 27-28% of banks.

The report states: “According to the FBI, victims reported losses of nearly 4 billion from pig butchering scams and other crypto fraud in the US last year—more than double the previous year. The true scale, however, is unknown.”

Internal barriers to agility

What’s more, banks report significant challenges in swiftly adapting their systems to emerging threats. A majority (59%) say it takes 4-6 months to update fraud models after identifying new financial crime red flags.

When asked about barriers to more frequent model updates, banks cited internal governance (27%), complexity (26%) and change management processes (24%) as key obstacles.

The survey also found that banks are dividing their financial crime-fighting resources relatively evenly across different threat categories. 

Terrorist financing and fraud including account takeovers each receive about 12% of time and budget allocations, while corruption receives the least attention at 10%.

AI: Cybersecurity’s double-edged sword

In the fight against financial crime, Artificial intelligence (AI) emerges as a contentious topic. More than half (57%) of banks believe AI will make financial crime detection more difficult, with 16% fearing it could render detection nearly impossible.

Conversely, 31% believe AI will ease detection efforts. Larger banks are notably more optimistic, with 54% expecting AI to simplify detection and 36% believing it could potentially eliminate financial crime.

As the report notes: “AI is great at detecting good and bad payments in the transaction process, but the payments industry has not yet come to terms with a paradigm shift in which fraudsters take over bank accounts and merchant websites.”

As criminals continue to innovate and exploit new technologies, it’s clear banks are struggling to keep pace, hindered by internal processes and resource constraints.

For Tom Hewson, CEO, RedCompass Labs, banks need "curious, autonomous AI agents that know what they are looking for and never tire or get distracted” to begin successfully mitigating the risks of fraud. 

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