Fraud Prevention in the Banking Industry

According to a recent article on Bloomberg, banks are considering using blockchain technology, the same platform used in bitcoin transactions. This change could prevent losses that are due to one particular type of fraud. Some companies are applying for and receiving financing from multiple banks, but are using the same invoice as proof of collateral for all of the banks. This allows the company to receive much more financing than they should be able to receive, and the banks lose a lot of money if the company defaults on their loan. This fraud is similar to if an individual were to receive several mortgages from various banks for a single house. If the individual were to default on their mortgage, they would keep a lot of cash, and the banks would each be left with only a portion of a house as collateral. The losses due to this financing fraud have been close to $700 million for banks such as Standard Chartered Plc and JPMorgan Chase.

The blockchain technology that the banks are considering using would create a unique hash value for each invoice, which would allow banks to know if that invoice has already been used as collateral for financing somewhere else. However, while this technology could help reduce fraud, it remains to be seen if it will actually be adopted. In order for the fraud prevention to work, the technology would need to be used universally among all banks, and historically banks have been less inclined to work cooperatively with one another. However, as this particular type of fraud continues to happen more frequently, perhaps this will be a collaborative project worth undertaking by the banking industry as a whole, leading to a reduction in fraud.