Fraud Trends: 5 Common Tactics and How to Counter Them

The Financial Brand reports that up to 70% of businesses say that fraud losses have increased in recent years, and more than half of consumers feel they are more of a fraud target than a year ago. Experts warn that Generative AI will be one of the greatest drivers of fraud in 2024, making it more accessible to do-it-yourself scammers. Financial institutions must balance the need to prevent and catch fraudulent transactions with the desire of their customers to avoid overzealous security measures that make doing business with them cumbersome and less convenient.

Jen Megee, PRI Director of Performance Enhancement, says there are five fraud tactics that PRI clients commonly experience, and she gives tips for how to best counter them to save the financial institution time and money.

• Romance scam fraud. This type of fraud involves a perpetrator who typically targets older, single people through details they learn on social media and direct messaging. The scammer will attempt to establish a relationship without ever meeting in person and then ask the customer to wire or electronically transfer them money (sometimes even mailing checks in via priority delivery), which they may say is being used to move closer or to visit the target. The bank’s customer may be asked for amounts of $5,000 or $10,000 multiple times until their account is totally depleted.
  • The best way to counter this type of fraud is through customer education, which should be part of every financial institution’s marketing and new account processes. “Help your customers recognize the red flags so they can shut down this type of fraud before it starts,” Megee said.   

• Check fraud. Although banking is moving more and more into the online world, there is still a need for paper checks, which means this type of fraud is alive and well. There are numerous types of check fraud, but one of the most prominent trends is altering payee information (such as checks drawn on businesses and IRS checks).  The perpetrator generally uses mobile or ATM deposit functionality to deposit the check rather than bringing it into a branch where a visual inspection of the check may derail the scam. By the time the scam is detected by the financial institution, the money is gone.
  • For businesses, implementing a positive pay solution is the best method to fight check fraud, Megee said. When a business signs up for positive pay, they present the bank with a daily check-issue file, which is a list of information about every check they’ve written in the past 24 hours, such as the date, dollar amount, check number and account number. When the bank receives a check for payment, the positive pay system verifies the check details against the check-issue file. If something doesn’t match up, the business must review and approve for clearance. Some banks are now mandating businesses that write many checks each month participate in positive pay to minimize check fraud losses.
  • For consumers, encouraging the use of online banking to view paid items on a regular basis will more expeditiously identify potential fraud.
  • While it’s not a good use of an FI’s time to review every mobile and ATM deposit that passes through its doors, they can monitor deposit parameters as well as new account activities using software enhancements from their vendors. Continuing to review trend and system settings while working with the vendor is critical to combatting check fraud. 

• Person to person (P2P) fraud. The Financial Brand estimates that APP/P2P fraud is the most common type of fraud (41%) impacting US businesses now. This includes transaction-based fraud and real-time payments through platforms like Zelle, Venmo and CashPay. “These platforms are often valuable targets for fraudsters because transactions move fast and are hard to trace or recover,” they write. P2P fraud often happens with new accounts in which the financial institution doesn’t know the transaction history of the customer yet. This type of fraudulent transaction generally begins with a check being deposited. The perpetrator will pay another person at another bank through ACH once the check is deposited, taking advantage of transaction clearing timing to leave the bank holding the bag.
  • Megee says banks can combat this fraud by declining to give immediate access to person-to-person transactions and imposing additional limits for new account holders. “Train frontline and operations employees who review deposits on the FI’s hold procedures on checks,” she said. “Don’t be afraid to have a conversation with customers and implement strong hold practices.”

• Check order fraud. Unlike when check fraud directly targets specific customer accounts with counterfeit checks, in this type, fraudsters order checks from a check printing vendor (usually a smaller, lesser-known company) with a valid routing number but a random account number that mimics the bank’s general sequence.
  • “Again, implementing strong hold practices and training employees to follow them will help reduce check order fraud,” Megee said. 

• Debit card “friendly” fraud and actual fraud. While true fraud, also known as identity theft, starts with a card or card number stolen, compromised or skimmed from the authorized user, friendly fraud is perpetrated by the authorized users themselves. This kind of fraud occurs when cardholders dispute legitimate charges with their financial institutions rather than trying to obtain refunds directly from merchants. The bank credits the transaction and processes a chargeback dispute, which is very often not recovered, and the bank bears the cost of closing the customer’s card and issuing a new one.
  • FIs can work with their vendors to produce reporting on trends in certain areas or categories. The bank then can follow up by phone to probe the issue further with its customer. If there is ongoing abuse, the FI may choose to terminate the customer’s access to a debit card.

General best practices for banks fighting fraud include increasing customer communication on fraud trends, and multiple channels of communication along with repetition of messages are crucial. Banks are using blog posts, email campaigns, text messaging and web banners to educate their customers on the fraud trends they’re seeing on a regular basis. Frontline education is also important. Train your employees to know what to look for and how to talk to your customers about what they’re seeing. Fraud education should be part of the normal process when people open new accounts with your institution.

Resources 

These Are the Biggest Fraud Risks Banks Will Face in 2024 – The Financial Brand

Trends 2024: Banks Must Ramp Up Protections as Mobile Fraud Grows – The Financial Brand

Friendly Debit Card Fraud Claims: Keeping Things Friendly with Your Customers –PRI 

Positive Pay 101: A Guide to Preventing Payment Fraud – bill.com 

Profit Resources specializes in identifying profitability improvement areas for financial institutions through revenue growth, cost control, streamlining processes, and effective use of technology. Contact us to learn more about our personalized approach to strategic planning to propel growth and improve profitability.