Community Banks to Benefit from AI in Fraud Detection, Warned of Increasing Cyber Crimes
Artificial Intelligence (AI) has become a double-edged sword for community banks. On one side, it offers the potential to combat fraud more effectively; on the other, it poses an escalating threat as cyber criminals increasingly exploit it. Federal Reserve Governor Michael Barr has called attention to both these aspects, emphasizing the need for banks to adapt, innovate, and stay vigilant in this rapidly evolving landscape.
The Potential of AI in Fraud Detection
Speaking at the Community Banking Research Conference, Barr highlighted the vast opportunities AI presents for fraud detection within community banks. He noted that while automated fraud detection hasn’t been cost-effective for some banks in the past, the current upsurge in AI capacity and service providers could potentially make this technology more affordable and feasible for smaller institutions. The governor’s speech can be found here.
“The huge buildout in AI capacity now underway, along with the explosion in the number of firms seeking to get into AI-based services, may have the potential for driving down costs enough to make AI-based fraud detection more feasible for community banks,” Barr said.
The Threat of AI-Generated Deepfakes
While AI offers promising solutions in fraud detection, it also presents a growing risk. Barr cautioned about the escalating use of generative AI deepfakes by criminals to commit fraud. Using only a brief sample of audio and personal information available on the internet, these criminals can impersonate a close relative in distress or a high-value bank client, thereby tricking banks and individuals.
“What was once the stuff of movies is now a reality, and a lot is at stake,” Barr said, noting that the use of deepfakes in cybercrime is growing very rapidly.
The Impact of AI on Employment and Community Banks
Barr also touched on the potential of AI to reshape the U.S. economy and its employment landscape. While AI could boost productivity, raise living standards, and spawn new industries, it could also cause significant disruption, especially in communities dependent on a few employers or a single industry.
He said, “I tend to be an optimist about the potential for AI to make workers more productive, raise living standards and create more jobs in new industries, but I am realistic in my expectation that it could cause considerable dislocation of workers and businesses, at least in the short run.”
Strengthening Defenses Against Cybercrime
Given the increasing threat of AI-generated deepfakes, Barr argued in an April speech that banks and regulators should take proactive measures to make such attacks less likely and more resource-intensive for criminals. This could involve increasing penalties for fraudulent attempts using AI and ramping up investment in cybercrime enforcement.
“Another way to disrupt the economics of cybercrime is by increasing penalties for attempting to use gen AI to commit fraud and increasing investment in cybercrime enforcement,” Barr said.
Community Banks and the AI Challenge
Community banks, often slower to adopt new technologies than their larger counterparts, are now grappling with the implications of AI. Alexander Price, CEO of First Citizens Bank, emphasized the need for community banks to smartly leverage AI without compromising their primary asset – the relationships they have with their customers.
“Community banks excel in crisis… because that’s where you want to come in and say, ‘Hey, I have this problem.’ And it is so unique to that person that no AI system could possibly say, ‘Here’s exactly what the solution is,'” Price said.
As community banks navigate the complex landscape of AI, they must strike a balance between harnessing this powerful technology and preserving their personal touch, all while staying alert to the increasing threat of cybercrime.
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