Is the UK becoming a scam paradise? In the last few months, we have witnessed several trends. Back in February this year, a report revealed that most scams targeting consumers are occurring on social media, and that the value of fraud in the UK more than doubled in 2023 compared to the previous year. The mentioned analysis indicated that the total reported value of fraud in the UK reached a staggering £2.3 billion (€2.69 billion) last year. This represents a 104% increase from 2022. 

At the same time, two of the UK’s most prominent financial startups have experienced a surge in alleged fraud cases, according to new data. Reports to Action Fraud concerning Revolut accounts increased by 27 percent year over year, reaching 9,159 cases in 2023. Similarly, reports of alleged fraud involving Monzo accounts rose by 23 percent year over year, totaling 4,466 cases.

Why is this happening now, and why specifically in the UK? We spoke to Joe Biddle, UK Markets Director at Trapets, who told us that while this has been an issue for a long time, now there’s more tech-savviness involved. “The reason scams are pinpointing challenger banks is because of their digital nature. Unlike traditional banks where you’d visit a branch, even though that’s becoming less common, challenger banks are fully digital. This opens up new avenues for fraudsters to exploit,” confirms Joe. 

Challenger banks operate primarily through digital platforms, and that makes them extra vulnerable to phishing attacks and social engineering frauds. According to Biddle, the rapid growth of challenger banks in the UK may have outpaced their ability to implement robust fraud prevention measures, creating opportunities for fraudsters. 

Additionally, the target audience for challenger banks tends to be the younger generation, who may be less aware of phishing and fraud tactics, making them more susceptible to scams. One thing is clear: more education about security risks are needed to prevent people falling into these traps. 

How to double-check without friction 

“Epidemic” might be a strong term, but the increase in fraud cases among challenger banks could indicate their rapid expansion and market penetration. This growth might be a factor, but it’s not necessarily the only reason for the rise in fraud cases.

Joe Biddle, UK Markets Director at Trapets

For Biddle, these challenger banks need to catch up with their fraud detection strategies. When new banks start operating, they must undergo due diligence and necessary checks to demonstrate their fraud prevention capabilities. “Their framework must be continuously evolving; it’s not just about ticking a box to say they can stop fraud. They need to stay on top of the latest fraud techniques and ensure their risk models and transaction monitoring processes are constantly updated to address new threats, rather than simply being content with compliance,” says the UK Markets Director of Trapets. 

What is the roadmap a challenger bank or a digital-first fintech should take to effectively tackle this situation? “I think it comes down to balancing the friction in the process,” adds Biddle. Challenger banks often have very streamlined and automated account setup processes, which attract customers who appreciate being able to open an account in minutes. “However, fraudsters also see this as an opportunity to easily set up accounts. Therefore, it’s crucial to get the friction right by implementing additional steps at the right points, such as enhanced authentication and detailed reviews, to ensure you’re allowing legitimate customers while preventing fraudsters from gaining access,” says the expert.

Behavioral analysis and comparing transaction data and patterns, become the gold standard in fraud cases. This means financial institutions should take a proactive approach: demonstrating due diligence while also preventing false reports. Additionally, Biddle mentions, cross-referencing transaction data with databases containing known fraud patterns can help detect fraudulent accounts or activities efficiently, without the need for exhaustive manual searches through individual transactions.

Bank’s homework: to avoid negative impacts

Fraud isn’t just harmful to clients; it also negatively impacts banks. They not only lose money but also suffer reputational damage. For the Trapets expert, financial losses are typically straightforward to identify, such as immediate impacts like unauthorized transactions and chargeback costs for reimbursing customers. However, quantifying the broader impact on reputation can be more challenging. “Losing customers due to fraud concerns can significantly affect an organization’s reputation and future customer acquisition. This factor, along with operational costs like investigating incidents and upgrading security measures, must also be considered when assessing the overall financial impact,” says Biddle. 

That takes us to the role of technology in tackling fraud. AI and machine learning have come a long way on this front: training models to analyze transaction data, banks can detect unusual behaviors that deviate from normal patterns. These systems can continuously learn from new data, adapting to evolving fraud tactics over time. While fraudsters are always devising new methods, leveraging advanced technology puts banks in a better position to combat them. But, for Biddle, it’s worth noting that some challenger banks still lack robust security measures like multi-factor authentication or biometric authentication.

Can we place complete reliance on technology, or is there still a necessity for human analysis on a case-by-case basis depending on the situation? “From a technological standpoint, while early warning systems are beneficial, banks and financial institutions still require the expertise of fraud specialists to make final decisions. These specialists, often with years or even decades of experience, have an intuitive understanding of fraud. They can anticipate how fraudsters think and behave, a skill that machines may not fully capture,” concludes Biddle.