Financial Risk Management in Digital-Only Banks: Addressing Fraud and Cybersecurity Threats in a Cashless Economy

Abstract

This study examines financial risk management in digital-only banking by analyzing fraud and cybersecurity threats using quantitative methodologies. Leveraging Verizon’s Data Breach Investigations Report (2024), the European Central Bank Cyber Resilience Oversight Report (2023), and the Financial Action Task Force Money Laundering & Fraud Prevention Report (2024), this research employs descriptive statistics, logistic regression, and Difference-in-Differences (DiD) analysis to assess fraud risks, cybersecurity framework effectiveness, and regulatory impact. Results indicate that phishing (35%) and ransomware (20%) account for the highest financial losses, averaging $5.5M and $7.1M per incident, respectively. Logistic regression confirms that Basel III compliance reduces fraud risks (-70.759 coefficient), while AI-driven fraud monitoring shows inefficiencies (21.918 coefficient). Regulatory enforcement leads to a 1.90% greater fraud reduction in strictly regulated banks. Recommendations include enhanced AI fraud detection, stricter compliance enforcement, multi-layered security measures, and targeted fraud awareness programs to strengthen digital banking resilience.