The Role of AI in Tackling Financial Transaction Fraud: How Have Regulators Responded?

Artificial intelligence (AI) stands at the forefront of innovations transforming industries worldwide in an era already marked by so many rapid technological developments. AI’s integration into our daily lives is not some fad but represents a fundamental shift in financial institutions' operations. As regulation's scope and complexity increase with technology's development in the financial services industry, this article will identify AI's key security challenges and how regulations must keep up.

Security is a huge concern for today’s financial institutions. With the introduction of digital banking and e-commerce, fraud has multiplied significantly. Many financial institutions are leveraging AI for fraud detection and prevention through machine algorithms that identify unusual patterns in customer behaviour. “We look at over 500 different attributes around [each] transaction, we score that, and we create a score –that’s an AI model that will actually do that. We do about 300 billion transactions a year,” said James Mirfin, Global Head of Risk at Visa Inc. These models continuously learn from the massive datasets generated by users, improving their ability to flag fraudulent activities with high accuracy in a way that humans could never achieve. On March 1 2024, the UK government updated the Economic Crime and Corporate Transparency Act to ensure that companies are liable if they do not have reasonable fraud prevention procedures. Organisations are making an apparent move to leverage the benefits of AI in any way they can.

Regulatory compliance is a critical consideration for financial institutions. They have to be able to navigate complex regulatory landscapes to ensure their AI applications adhere to legal and ethical standards. With the ever-growing regulation of AI, compliance teams need to be involved in organisation-wide development efforts every step.