Even in this current year, frauds continue to haunt financial services. This is why banks and any type of fintech must stay vigilant by applying strong payment fraud prevention, ensuring safety for all customers.
Preventing fraud seems to be a simple matter, but the ground reality states otherwise. A recent 2024 report from cybersecurity platform Alloy found that 35% of financial services received more than 1,000 fraud attempts in the last year.
As a financial service provider, knowing key strategies to prevent payment fraud is not just a wisdom, but rather an obligation. This article will provide an overview of payment fraud, how many types they are, and what to do in order to prevent them.
What is Payment Fraud?
When it comes to a definition, there are many ways to describe payment fraud. For a simple explanation, payment fraud is an act of illegally conducting unauthorized transactions using stolen information, such as login credentials.
When a payment fraud occurs, the victim may not realize it sooner, giving enough time for fraudsters to transfer all the money or make a purchase. At this point, the victim may raise a dispute for unauthorized transactions to the financial service.
The Impact of Payment Fraud in Banking and Financial Services
Not only the victim of payment fraud faces severe financial losses; the financial services that the victim relies on will also need to deal with its dire consequences. Just how does payment fraud affect banking and financial services?
- Customers lose confidence in trusting affected financial services. Even if the fraud case has been settled, customers might not get all the stolen money back, causing them to no longer trust the services.
- Fraud leaves damage to financial service reputation. Customers will blame financial services for lack of security and will be likely to spread the ill news.
- Affected financial services need to spend money on fraud investigations. These kinds of investigations often do not come with a cheap cost, causing further damage to financial health.
- Affected financial services face legal consequences. The worst case, they have to deal with a lawsuit from victims for failing to provide secure services.
Types of Payment Fraud in Financial Services
There’s always a way or another for fraudsters to get something that does not belong to them. Here are several types of payment fraud financial services may encounter:
1. Account Takeover Scams
This is by far the most known payment fraud that has been done. Fraudsters simply take over a victim’s account credentials by breaching financial services’ data or luring victims to type them in on fake phishing websites.
Once they gain access, fraudsters transfer money from their account, make a purchase, or apply for loans. On top of that, they also change the login information, ensuring victims can’t immediately take a measure for this breach.
2. Card-not-present (CNP) Transactions Fraud
As the name suggests, this is an unauthorized transaction done by fraudsters without a need for a credit card. All the information they need to do this transaction is just credit card details and its expiration date.
Since this fraud doesn’t need a credit card, CNP transaction fraud can only be done for online purchases. Financial services usually use Address Verification System (AVS) as payment fraud detection for this particular fraud.
3. Credit Card Testing and Cracking
If the financial services have ever received any data breaches, it is likely that the data now exists somewhere in the dark web. However, such data may be outdated or not have enough information for completing a transaction.
To solve this, fraudsters perform card testing, which is a test by performing a few small transactions to check whether the information is enough. Card cracking, on the other hand, is basically checking with the brute force method.
4. Fraudulent Check Activities
This fraud is simply done by either forging check signatures, altering information on checks, or printing counterfeit checks. The ultimate reason is clear; fraudsters will gain an amount of money that is written on the check.
5. Business Email Compromise
Business Email Compromise (or BEC in short) is a large-scale fraud attempted towards businesses, rather than account holders. These are several techniques fraudsters use to perform BEC on its intended targets:
- Hacking or spoofing the CEO’s email account, then instructing employees to transfer large sums of money.
- Gain unauthorized access to employee accounts, then inform suppliers or vendors to transfer money to fraudulent bank accounts.
- Posing as a legitimate vendor the company works with, then sending a fake bill in order to gain money from them.
Strategies for Preventing Fraud in Financial Services
After knowing the impacts of payment fraud, it is understandable that financial services must learn the best payment fraud prevention solution. Learn how banks prevent credit card frauds and others using these solutions:
AI and Machine Learning as Fraud Detectors
AI with machine learning capabilities can be implemented as an authentication system. Using advanced algorithms, AI authentication can detect anomalies from account activities that may have occurred by fraudsters.
Financial services can also use AI to constantly learn about potential fraud schemes that will be used in the future. This allows financial services to always prepare their best payment fraud prevention.
Also Read: What Is AI Authentication & How Can It Benefit Your Business?
Multi-Factor Authentication for Security
Implementing stronger authentication methods like MFA can help financial services to deal with fraudsters. This makes just knowing login credentials not enough for them, making fraud attempts far more difficult.
Real-time Monitoring to Prevent Fraud
Financial services need to always monitor for any suspicious—such as unusual, sudden, large transfers—using real-time technologies. For example, AI can perform real-time monitoring, which makes it a good online payment fraud prevention tool.
Educating Customers on Fraud Risks
Customers aren’t always a king, but they still have a pivotal role to keep fraudulent activities off the bay. Financial services can always educate them in order to prevent them from further potential fraudulent risks by:
- Train customers to not easily fall for a phishing attempt. Tell how financial services usually operate, making sure they know what to expect.
- Ensure to reach customers easily to be able to educate them. Find out which channel they always use for easier communication.
Strengthening Controls and Training Staff
Lastly, financial services can fortify themselves by empowering their internal controls by training staff accordingly to prevent frauds such as BEC. For example, emphasize that the executive never emails them for a money transfer.
At the bottom line, a solution to how to prevent card fraud and others isn’t hard but still requires an extensive strategy. Remember, a financial service can always use the best payment fraud prevention—such as Keypaz—to withstand any fraudulent attacks.