Payment Fraud: Top 10 Biggest Threats to Banks and Fintechs

The industries of digital finance, including fintech and banking, are engaged in an exceptionally challenging battle against fraud. This ongoing battle involves risks associated with various types of payment fraud. Companies are not just combating to protect their assets, but are also struggling to maintain trust and ensure the seamless operation of financial services.

We will offer you a detailed guide to the top types of payment fraud affecting the banking and fintech sectors today. By analyzing the mechanisms behind each fraud type, from Account Takeover to Authorized Push Payment fraud, we endeavor to arm professionals and stakeholders within these industries with the knowledge needed to recognize, prevent, and mitigate these fraudulent activities.  

As we delve into the intricate world of payment fraud, our goal remains clear: to provide an academic yet accessible overview of the challenges and solutions surrounding payment fraud, equipping our readers with the insight required to navigate this complex landscape effectively.

What is payment fraud?

While digital transactions are evolving and becoming more sophisticated each year, sadly this has opened the floodgates to various fraudulent activities. Payment fraud is one of them. Payment fraud encompasses any unauthorized or deceitful transaction aimed at siphoning funds from individuals or organizations. Its ramifications extend far beyond financial losses, eroding consumer trust, damaging brand reputation, and imposing hefty regulatory penalties on financial institutions.

For fintech companies and banking institutions, the stakes are now higher than ever. These entities not only manage vast sums of money but also need to focus on their client's financial data while outmaneuvering modern fraud schemes. For that reason, understanding payment fraud goes beyond mere regulatory compliance or loss mitigation. It is a critical component of maintaining operational integrity, customer trust, and the overall health of the financial ecosystem.

Understanding the intricate dynamics of payment fraud is the first step in developing robust defense mechanisms. It enables financial institutions to stay ahead of fraudsters, adapting to new threats as they emerge. Knowledge of how fraud is perpetrated informs the development of advanced detection tools and preventative measures, leveraging cutting-edge technologies like machine learning and blockchain to predict and prevent fraudulent activities before they occur.

In an environment where consumer confidence is as valuable as financial capital, the ability to demonstrate strong security measures against payment fraud is a competitive advantage. It reassures customers that their financial interests are protected, thereby fostering a relationship of trust and loyalty that is indispensable in the digital age.

Financial sector fraud impact statistics

Fraud, in general, has seen a substantial rise in recent years, and payment fraud is a huge part of it. The greatest impact was felt in the banking sector. For example, in 2022, fraudsters were more inclined to target larger organizations (those with annual revenue of above $1 billion), exposing deficiencies around process controls utilizing more advanced online fraud tactics such as social engineering, as well as other more complex fraud payment methods.

Across Europe, Germany, and France the biggest impact resonated within the e-commerce market. According to a recent European Parliamentary survey, two out of every three online retailers in Germany identified an increase in e-commerce fraud, while over 85% of online merchants in Switzerland reported having been struck by fraudsters last year (source: JP Morgan).

Also, during the first half of the current fiscal year fraud has marked an increase to a staggering 14,483 cases, according to an RBI report.

Like so many other processes, even fraud has to start somewhere. The easiest way to prevent these processes is to detect them before they even take place. That's why illegal behavior such as New Account Fraud can be countered with methods such as Account Onboarding Protection. 

However, that's only one example. There are diverse types of fraud out there, and they have a powerful impact on many industries, so let's have a look below. 

What are the different types of payment fraud?

Payment fraud manifests in various forms, each with its unique mechanisms and impacts on the financial sector. There is quite a wide variety of different fraud tactics today and most of them start with fake bank accounts. However, in the following section, we offer a brief overview of the most prevalent types of payment fraud within the fintech and banking industries, providing a clear and focused examination of each.

1. Account takeover (ATO)

Account Takeover occurs when unauthorized users gain access to a victim's financial accounts, often using stolen login credentials. The perpetrator can then transact as if they were the legitimate account holder.

How it occurs: ATO typically stems from phishing attacks, data breaches, or malware that harvests credentials. Social engineering tactics are also common, tricking users into revealing sensitive information.

Impact on businesses and consumers: this fraud can lead to significant financial losses, damage to customer trust, and long-lasting reputational harm to institutions.

Preventive measures and solutions: robust authentication processes, continuous monitoring of account activities, and educating customers about secure practices are critical.

To go beyond these aspects, you can read more and uncover what Account Takeover Fraud is all about. 

2. Chargeback fraud

Aso known as 'friendly fraud,' this occurs when a consumer makes an online purchase with their credit card and then requests a chargeback from the issuing bank after receiving the goods or services.

How It occurs: consumers may claim that they never received the item, it was not as described, or they did not authorize the purchase.

Impact on businesses and consumers: businesses incur double losses – the revenue from the sale and the product itself, plus additional chargeback fees.

Preventive measures and solutions: clear communication, accurate product descriptions, and prompt customer service can reduce instances of chargeback fraud.

3. Stolen card fraud

This type of fraud involves unauthorized credit or debit card transactions following the theft of physical card details.

How it occurs: thieves can physically steal cards or obtain card data through skimming devices or data breaches.

Impact on businesses and consumers: both parties face financial losses, and consumers may suffer from compromised personal data and the hassle of securing their accounts.

Preventive measures and solutions: implementing EMV chip technology, real-time transaction monitoring, strong customer authentication, and Transaction Risk Analysis, can help mitigate risks.

4. Money laundering

Money laundering involves disguising the origins of illegally obtained money, making it appear as though it originated from a legitimate source.

How it occurs: through complex layers of financial transactions, or by using businesses to funnel illicit funds.

Impact on businesses and consumers: it undermines the integrity of financial institutions and can attract severe regulatory penalties.

Preventive measures and solutions: comprehensive compliance programs, robust monitoring systems, and cooperation with regulatory bodies are essential.

5. Phishing

Phishing is a deceitful attempt to obtain sensitive information such as usernames, passwords, and credit card details by masquerading as a trustworthy entity in electronic communications.

How it occurs: typically, through emails or messages that lead users to enter personal information on a fake website that looks legitimate.

Impact on businesses and consumers: leads to identity theft, and financial loss, and can breach entire corporate networks.

Preventive measures and solutions: regularly updating security protocols, educating customers and employees, and using advanced email filtering solutions.

6. Identity theft

Identity theft involves stealing personal information to impersonate someone else, usually to conduct transactions or frauds in their name.

How it occurs: through stolen documents, data breaches, or online information theft.

Impact on businesses and consumers: financial losses, damaged credit ratings, and significant recovery time and costs for victims.

Preventive measures and solutions: secure handling and disposal of personal information, fraud alerts, and continuous monitoring of financial accounts.

7. Refund fraud

Refund fraud occurs when an individual deceitfully gains money or products from a company by exploiting the refund process.

How it occurs: tactics include returning stolen goods for cash, using forged receipts, or manipulating online systems.

Impact on businesses and consumers: direct financial losses and potential inventory discrepancies.

Preventive measures and solutions: enhanced verification during the refund process and tracking patterns that may indicate fraudulent activity.

8. Marketplace fraud

In online marketplaces, fraud can involve sellers setting up fake listings or buyers using stolen card details to purchase goods.

How it occurs: scammers create fraudulent listings or exploit payment systems to commit fraud.

Impact on businesses and consumers: losses due to non-delivery of goods, receiving counterfeit items, or payment reversals.

Preventive measures and solutions: implementing secure payment gateways, user verification processes, and transaction monitoring.

9. Card Testing

Card testing involves using stolen card information to make small transactions to test if card details are still valid before making larger fraudulent purchases.

How it occurs: using automated scripts to make multiple low-value purchases across various websites.

Impact on businesses and consumers: unauthorized transactions and increased operational costs due to chargebacks and refunds.

Preventive measures and solutions: detection systems that flag multiple small transactions in a short period, and verification for suspicious activities.

10. Authorized Push Payment (APP) Fraud

We have already mentioned APP fraud at the beginning of the article. APP fraud occurs when fraudsters deceive individuals into sending money directly from their bank account to an account controlled by the fraudster.

How it occurs: through social engineering techniques like impersonating legitimate entities or urgent request tactics.

Impact on businesses and consumers: immediate financial losses and difficult recovery due to the authorization of the transaction by the victim.

Preventive measures and solutions: enhanced customer education, verification processes before transaction approval, and real-time transaction monitoring.

Synthetic identity fraud: a closer look

Now, when speaking about synthetic identity fraud, it’s important to note that it is indeed a type of payment fraud. However, we have decided to have a deep dive into this particular type of fraud due to its complexity. Synthetic identity fraud involves the creation of a new, fictitious identity using a combination of real and fabricated information, or entirely fake credentials. This type of fraud is particularly insidious as it can go undetected for long periods, allowing fraudsters to build credit and commit larger-scale financial crimes.

Synthetic identities are often constructed by starting with a real social security number (especially those less likely to be monitored, like those of children or the elderly), and pairing it with fake names, addresses, or birth dates. Fraudsters then engage in small financial transactions to begin building credit history.

This type of fraud can also lead to substantial financial losses for financial institutions. It complicates the credit landscape and can unknowingly involve individuals whose personal information has been used without their consent, potentially damaging their creditworthiness.

Visit our recent blog post to discover what synthetic identity fraud is and how it works.

How payment fraud detection is possible?

Detecting payment fraud effectively requires a comprehensive understanding of customer data, behaviors, and the digital environment they operate. By employing advanced technologies and strategies at critical points of customer interaction—onboarding, sign-up, and checkout—businesses can significantly enhance their fraud prevention capabilities.

Onboarding stage: establishing trust from the start

During the onboarding process, businesses have their first opportunity to assess new customers. At this stage, using sophisticated digital footprint analysis is crucial. By integrating solutions that perform real-time checks such as IP analysis, device fingerprinting, and BIN lookups, companies can verify the legitimacy of a customer's digital identity. These technologies help confirm whether the device configuration, location, and banking details align with a genuine user profile. Implementing robust anti-money laundering (AML) controls during onboarding also ensures compliance with regulatory requirements and helps screen out potential fraudsters based on risk assessment.

After all, AML fraud is yet another challenge currently faced by many financial institutions and organizations, although there are proactive measures that can help such as AML Screening. 

Sign-up stage: securing entry points

At the point of account creation, validating the authenticity of user-provided information is paramount. This can be achieved through reverse email and phone lookups, which quickly cross-reference the data against extensive databases of digital history and prior user activities. Such checks are essential to confirm if an email or phone number has been involved in previous breaches or if they appear on any blacklists, thereby flagging potential risks early. Machine learning algorithms play a crucial role here, adapting and learning from incoming data to improve detection rates and reduce false positives, enabling secure and frictionless sign-ups.

Checkout stage: protecting transaction integrity

The checkout process is a critical juncture where real-time transaction monitoring becomes indispensable. Here, businesses must verify the validity of payments by cross-referencing transaction data with customer profiles. Machine learning models are particularly effective in this context, as they analyze transaction patterns and flag anomalies that deviate from established behaviors. Techniques such as device fingerprinting and IP analysis can also identify if a transaction is originating from a new device or an unusual location.

ML and AI

Utilizing AI and Machine Learning not only enhances the accuracy of real-time fraud detection but also allows systems to continuously learn and adapt to new fraudulent tactics. Whitebox machine learning solutions provide transparency into decision-making processes, offering insights into why certain transactions are flagged. This transparency is vital for refining fraud prevention strategies and for maintaining trust with users, who can be assured that their transactions are being monitored for genuine security reasons rather than arbitrary algorithmic decisions.

AML and global compliance

Alongside direct fraud detection methods, maintaining stringent AML protocols is critical. These systems monitor for unusual transaction patterns, perform due diligence, and ensure that businesses stay compliant with international regulations. This not only helps in preventing fraud but also shields companies from potential legal consequences and hefty fines associated with non-compliance.

By deploying these integrated technologies and strategies at the onboarding, sign-up, and checkout stages, businesses can create a secure ecosystem that not only detects but also prevents payment fraud effectively. This comprehensive approach ensures that each step of the customer journey is protected, supporting a secure and trustworthy digital financial environment.

Also, techniques like FRAML (Fraud and Anti-Money Laundering) can be an effective shield to modern monetary systems.

Digital footprints as a fortification against fraud

Utilizing digital footprints creates a powerful barrier against the perpetration of payment fraud. These footprints, which are traces left by users as they interact with digital services, provide valuable data that can be leveraged to authenticate identities and assess transaction legitimacy. By analyzing these signals, businesses can significantly bolster their fraud prevention measures.

• Phone number intelligence: this involves scrutinizing phone numbers provided during transactions to verify their authenticity. Such checks determine whether a phone number is currently in service, if it matches the geographic location of the user, and whether it has been flagged in previous fraudulent activities.
• Email address intelligence: analyzing email addresses can reveal a wealth of information about a user. Investigations include assessing whether an email is from a reputable domain, its age, and its history in relation to fraud. Additionally, checking if the email has been compromised in past breaches provides a complementary level of risk assessment.
• IP address data: IP analysis helps in understanding the geographic location of a transaction. It can also detect if an IP address is associated with any suspicious activities or if it is routed through a proxy or VPN, which might indicate a higher risk of fraud.
• Device detection: examining the hardware used by a customer can uncover indicators of fraud. This includes identifying jailbroken devices or those running software typically associated with fraudulent activities.
• Browser fingerprinting: this technique gathers data from a user's browser settings and configurations to create a unique identifier that can track and identify potential fraudulent behavior. Browser fingerprinting can detect anomalies in user behavior that deviate from the norm.

Utilizing these digital signals allows companies to construct a robust defense against fraud. By integrating comprehensive digital footprint analysis into their fraud detection systems, businesses can not only detect and respond to threats in real-time but also anticipate and mitigate potential risks before they materialize.

Fortifying finance: next steps in fraud prevention

The battle against payment fraud is dynamic and requires a sophisticated approach to stay ahead of malicious actors. As outlined in this article, understanding the various types of payment fraud and employing advanced technological solutions are crucial for any business operating in the digital finance space. Utilizing digital footprints provides a formidable line of defense, harnessing the power of Phone Number Intelligence, Email Address Intelligence, IP Address Data, Device Detection, and Browser Fingerprinting to secure transactions and protect user data.

For companies looking to safeguard their operations and enhance their security measures, embracing these advanced techniques is not just an option but a necessity. 

We encourage all stakeholders in the fintech and banking industries to consider these insights and integrate robust fraud detection and prevention mechanisms into their platforms.  

Feel free to reach out to our team of experts to unlock more solutions.