Fraud is Growing and Mutating. Cut It Off As Early As Possible
According to a new report, the explosion of financial fraud – and its increasing sophistication and professionalization – will require a refreshed response from banks and credit unions, one that emphasizes upstream prevention in onboarding and identity verification in real time.
By David Evans, Chief Content Officer at The Financial Brand
The report: 2025 State of Fraud Report
Source: Alloy
Why we chose this report: Fraud continues to blossom across the financial landscape, but its preferred targets and vectors are shifting rapidly. Understanding these changes is important in shaping effective responses from banks and credit unions.
Executive Summary
The 2025 State of Fraud Report reveals a critical inflection point in the financial industry’s battle against fraud, with 60% of institutions reporting increased fraud attacks affecting both consumer and business accounts. The landscape is dominated by sophisticated fraud rings, while digital channels (online or mobile banking) remain the primary vulnerability.
In the face of rising threats, financial institutions report they are responding by implementing AI-powered fraud detection and investing in identity risk solutions in 2025.
The report highlights a significant shift toward proactive fraud prevention, with organizations recognizing that reputational damage can be as devastating as direct financial losses.
Key Takeaways and Data Points
- Fraud attacks continue to evolve and increase, with nearly two-thirds of financial institutions experiencing growth in fraud events, led by enterprise banks at 67%, while 31% of organizations faced total fraud losses exceeding $1M in the past year.
- Professional fraud rings have emerged as the dominant threat, responsible for almost three-quarters of attacks, marking a shift from previous years when first-party fraud was more prevalent among top fraud types.
- AI adoption for fraud prevention has reached near-universal levels, with 99% of institutions now using AI tools and 93% believing machine learning will revolutionize fraud detection.
- Financial institutions are prioritizing identity-based fraud prevention, with 64% planning to invest in identity risk solutions in 2025, acknowledging their effectiveness in reducing fraud rates.
What we liked about this report: It’s a comprehensive look at the state of fraud in financial services, while pinpointing significant differences in both fraud patterns and fraud response among institutions of different types and sizes. The report also spotlights common points of failure (onboarding) and common operational shortfalls (real-time detection).
What we didn’t: The report doesn’t pass explicit judgement on which fraud prevention tactics are most effective and leaves a couple of intriguing ideas (such as "citizen fraudsters) relatively unexplored.
The Digital Transformation of Fraud
The financial sector faces unprecedented challenges as fraud increasingly shifts to digital channels. The report reveals that 80% of fraud events now occur through online or mobile banking platforms, despite institutions investing equally in physical and digital security measures.
This digital transformation of fraud has particularly impacted enterprise banks, with 67% reporting increased fraud activity, significantly higher than their mid-market counterparts at 52%. Most concerning is that while 56% of financial organizations detect fraud in real-time at the point of transaction, there remains a critical gap between detection and response, often allowing fraudulent transactions to proceed even after being flagged as suspicious.
A notable shift has occurred in the source of fraud attacks, with 71% of incidents now attributed to professional fraud rings rather than individual actors. This trend coincides with the widespread adoption of AI technologies, both by fraudsters and financial institutions. The financial sector has responded aggressively, with 99% of organizations implementing AI-powered fraud detection systems and 93% believing that machine learning will revolutionize their fraud prevention capabilities.
The surge in organized crime has led to more sophisticated attack patterns, with fraudsters exploiting vulnerabilities across multiple channels and utilizing advanced technologies to circumvent traditional security measures.
Prevention Strategies and Investment Priorities
Financial institutions are adopting more sophisticated approaches to fraud prevention, with 64% planning to invest in identity risk solutions in 2025. This strategic shift reflects a growing understanding that early detection and prevention are more effective than post-incident response.
Notably, only 33% of organizations detect fraud at the onboarding stage, highlighting a significant opportunity for improvement in early fraud prevention. Enterprise banks are leading this transformation, with 38% successfully identifying fraud during customer onboarding, compared to lower rates among mid-market institutions and fintechs.
Different financial sectors face varying challenges and have developed distinct response strategies. Enterprise banks report more credit card and check fraud than other sectors, while fintechs struggle primarily with account takeover (ATO) fraud. Mid-market institutions face unique challenges, reporting higher levels of fraud in their contact centers compared to mobile banking channels. These variations have led to sector-specific investment priorities, with enterprise banks focusing heavily on alternative data sources (42% planning investment) while fintechs prioritize document verification solutions (55% planning investment).
The Cost of Fraud
The financial impact of fraud remains substantial. However, the consequences extend beyond immediate financial damage. Reputational harm emerged as the top concern, cited by 73% of respondents, followed closely by customer attrition and regulatory penalties.
This multifaceted impact has prompted increased investment in fraud prevention, with 87% of organizations agreeing that the return on investment justifies the expenditure. The cost burden varies significantly by sector, with 11% of mid-market banks reporting losses exceeding $5M, compared to just 4% of enterprise banks and 2% of fintechs.
The landscape is further complicated by evolving regulatory requirements and technological capabilities. Nearly two-thirds of financial organizations plan to increase their fraud prevention investments in response to regulatory scrutiny, particularly around payments fraud and reimbursement requirements.
This regulatory pressure, combined with the rapid advancement of AI and machine learning capabilities, is pushing institutions toward more comprehensive, integrated fraud prevention strategies that balance customer experience with robust security measures.
Editor’s note: This article was prepared with AI language software and edited for clarity and accuracy by The Financial Brand editorial team.
