Online Fraud Prevention

Online fraud is a serious threat that businesses and customers face worldwide. The cost of identity fraud in the United States alone reached $43 billion in 2022, according to a report by Javelin Strategy & Research. Fraudsters continually exploit new technologies and strategies, making it a challenge for businesses to stop fraud. As a result, businesses need agile fraud prevention tools that can keep up with evolving tactics while still providing fast and convenient onboarding for legitimate customers.

What Is Fraud?

Fraud is an act of deception committed by individuals or groups to gain something of value, such as money or access to a business. Identity fraud involves using someone else’s identity to commit fraud. Modern technology has accelerated the evolution of fraud, with the digital proliferation of personally identifiable information (PII), account numbers, mobile phone numbers, and passwords increasing the risk of various types of fraud. Large-scale data breaches have led to stolen identities and identity theft, fuelling further fraudulent activities. Fraudsters can steal vast sums of money with the click of a button, causing financial losses and reputational damage to businesses, as well as creating a lengthy process for individuals to recover from identity theft.

The Common Types of Online Fraud

Online fraud can manifest in various forms. Here are some examples of common fraud schemes:

1. New Account Fraud: Fraudsters use stolen or synthetic identities to open new accounts, leading to chargebacks, losses, and reputational damage for businesses. This type of fraud typically occurs within 90 days of account opening and is also known as application fraud or account origination fraud.
2. CNP Fraud: Card-not-present (CNP) fraud occurs when someone uses stolen or cloned card information to make online purchases without the physical card or cardholder verification. E-commerce fraud is the most prevalent form of CNP fraud, and it can result in liability falling on the merchant, leading to chargebacks, losses, and increased fees.
3. Identity Fraud: Identity fraud happens when someone uses another person’s personally identifiable information without authorisation to deceive a third party, resulting in financial losses and legal problems. The digital landscape contains a wealth of PII that is just one data breach away from being in the hands of fraudsters or organised crime rings. Fraudsters can create synthetic identities by combining real and fake information from the dark web, enabling them to commit identity fraud.
4. Account Takeover Fraud: Account takeover fraud involves fraudulently gaining control of an account to access money, perform unauthorised transactions, or gain entry to other accounts. Fraudsters can exploit the reuse of passwords across multiple accounts to gain unauthorised access. For example, SIM-swap fraud allows fraudsters to access a mobile device, gain access to email and other personal accounts, and then take over those accounts.
5. Chargeback Fraud: Chargeback fraud, also known as friendly fraud, occurs when someone requests a credit card charge reversal illegitimately. It can be costly for businesses, leading to reputational damage and potential termination of their merchant accounts.
6. Bank Fraud: Bank fraud involves attempting to illegally acquire assets from financial institutions or their customers. Examples include counterfeiting, check fraud, or loan scams. Online banking has opened up new opportunities for fraud, such as mobile check deposits or falsified online loan applications.
7. Payment Fraud: Payment fraud involves completing false or illegal transactions. Bad actors can exploit payment fraud in almost every online transaction, connecting it to earlier crimes like data theft or using it to commit additional crimes such as money laundering.
8. Merchant Fraud: Fake merchant accounts that masquerade as legitimate businesses are fronts for various fraud schemes. These schemes include processing illegitimate transactions, using another identity to set up a merchant account, processing unknown transactions for another business, or hiding the true nature of merchant activities. This type of fraud poses significant risks and costs for financial institutions that acquire these merchants.

The Growing Threat of Fraud

While technology advancements have created new opportunities for fraudsters, consumers’ knowledge of mobile and online safety hasn’t necessarily kept pace. However, organisations that have a clear understanding of fraud threats and strategies for mitigation can better protect themselves and their customers. Fraudsters have access to the dark web, where they can find fraud tools, data, strategies, hacker groups, and fraud-as-a-service offerings. Additionally, fraudsters continue to use traditional strategies, including social engineering, to manipulate individuals and gain unauthorised access to sensitive information. Fraud prevention teams continuously adjust their strategies to mitigate the broad range of threats. However, businesses also face the challenge of balancing fraud prevention with providing fast and convenient customer experiences. Slow onboarding processes can lead to customer frustration and abandonment, highlighting the need for efficient fraud prevention measures.

Strategies to Prevent Online Fraud

Preventing online fraud requires a holistic and proactive approach as a core business competency. Organisations across all industries must identify and prevent new threats, such as money laundering, account takeover, and identity theft. To manage the broadest possible range of fraud risks, businesses need to collaborate with identity verification companies. Here are some strategies and best practices to prevent online fraud:

1. Verify the Identity of Customers: The initial opportunity to prevent online fraud is by verifying the identity of customers during account opening and throughout the customer journey. Identity verification capabilities that leverage multiple data sources, such as biographic, document, and network data, can verify customers in real time with minimal friction.
2. Implement Risk-Based Authentication: Risk-based authentication adjusts the level of verification based on the risk associated with each customer or transaction. By analysing factors like device fingerprinting, geolocation, IP address, transaction history, and user behaviour, risk-based authentication determines a risk score and applies the appropriate authentication method.
3. Protect Data: Protecting sensitive data from unauthorised access or misuse is a legal requirement that also helps prevent online fraud. Data protection capabilities, such as encryption, anonymisation, or tokenisation, ensure security and privacy. Best practices for data security, including strong passwords, software updates, and data backups, help companies comply with regulations.
4. Educate Customers: Companies that educate customers about the risks of online fraud and how to avoid it can build trust and protect users. Providing customers with tips on recognising and reporting fraudulent activities, such as phishing emails, fake websites, or suspicious transactions, can empower them to stay vigilant. Encouraging secure password usage, enabling multifactor authentication, regular account monitoring, and reporting suspicious activity also contribute to prevention.
5. Innovate and Adapt: Companies that innovate and adapt to the changing landscape of fraud can improve their defences. Leveraging tools and technologies that incorporate artificial intelligence, machine learning, and biometrics can help businesses stay ahead of fraudsters.

Strategies for Fraud Prevention Throughout the Customer Life Cycle

While monitoring for fraud throughout the customer life cycle is essential, stopping bad actors before they enter the system eliminates the risk of damage. Here are some strategies for fraud prevention at different stages of the customer journey:

1. Identity Verification: During the account-opening process, identity verification can flag potential fraudsters and prevent damage. Identification information anomalies, such as outdated or mismatched data, can prompt further examination. Cross-referencing multiple data points and sources for identity checks creates higher barriers against fraudsters.
2. Identity Document Verification: Identity document verification establishes proof of possession of a legitimate identity document that matches the submitted data. Combining identity document verification with a selfie and liveness check adds additional layers of certainty during onboarding.
3. Fraud Risk Management Program: Implementing a fraud risk management program provides a framework for identifying, assessing, mitigating, monitoring, and reporting fraudulent activities. Fraud prevention not only protects the bottom line but also minimises reputational harm and builds customer trust. Assessing fraud risk and providing fraud awareness training to employees ensures that security remains a top priority.
4. Leverage Fraud Detection Tools: Address verification services and card verification value tools can combat fraud related to credit and debit cards. According to the U.S. Federal Trade Commission, most fraud originates from credit card, debit card, and payment apps or services.
5. Take Advantage of Fraud Management Software: Automated fraud management systems that incorporate machine learning and predictive analytics can help businesses reduce fraud by identifying hidden correlations between user behaviour and the likelihood of fraudulent actions.

A Holistic Approach to Fraud Prevention

Fraudsters are continually searching for vulnerabilities and acting swiftly once they find them. To effectively combat fraud, businesses need a holistic view of customers and their transactions, providing real-time risk scoring. This requires the use of data and analysis tools that guide verification workflows and integrate information from multiple systems. Orchestrating fraud indicators into a centralised platform that tracks user lifecycles and generates meaningful alerts is crucial. Evaluating the customer journey across touchpoints allows companies to optimise risk controls by leveraging cloud-based systems, artificial intelligence analysis, machine learning, and automated verification workflows. Awareness of fraud techniques and prevention strategies strengthens defences, and companies can fortify these defences with agile, integrated, and scalable fraud prevention tools.

In conclusion, online fraud prevention is a critical aspect of business operations in the digital age. By adopting proactive strategies, leveraging advanced technologies, and educating customers, businesses can minimise the risks associated with online fraud and protect both their bottom line and their customers’ trust.