Fraud Prevention Technologies and Strategies to Protect Your Business

About Fraud

Fraud is a serious threat to businesses and customers around the world. 

According to a report by Javelin Strategy & Research, identity fraud in the U.S. alone cost $43 billion in 2022. But stopping fraud presents a challenge for businesses because it’s a moving target.

Fraudsters constantly exploit new technologies and strategies to find a way in. That forces businesses to search for agile fraud prevention tools that can keep up and still ensure fast, convenient onboarding for legitimate customers.

What Is Fraud?

Fraud is an act of deception committed by an individual or group to gain something of value, such as money or access to a business. Identity fraud involves using someone else’s identity to commit fraud. 

Fraud isn’t new, but it’s always evolving. 

Modern technology has accelerated that evolution in fraud. The digital proliferation of personally identifiable information (PII), account numbers, mobile phone numbers and passwords has increased the risk of account takeover, card-not-present (CNP) fraud and new account fraud.

Large-scale data breaches have led to stolen and identity theft, which fuels more fraud. With the click of a button, fraudsters can steal millions of dollars, damage a business’s reputation and force people to spend years digging out from an identity theft mess.

The Common Types of Online Fraud

Online fraud can take many forms. Here are some examples of those fraud schemes.

New Account Fraud

This occurs when fraudsters use stolen or synthetic identities to open new accounts. It can result in chargebacks, losses and reputational damage for a business.

New account fraud usually occurs within 90 days of account opening. It’s also referred to as application fraud or account origination fraud.

CNP Fraud

CNP fraud occurs when someone uses stolen or cloned card information – such as name, address and account number – to make online purchases without the physical card or cardholder verification. Without the card, the physical security features are unavailable, and the liability can fall to the merchant, which faces chargebacks, losses and increased fees.

Ecommerce fraud is the most common type of CNP fraud.

Identity Fraud

Identity fraud occurs when someone uses another person’s PII without authorization to deceive a third party. That can result in financial losses and legal problems.

The digital landscape is filled with PII that is just a data breach away from being in the hands of fraudsters or organized crime rings. Identity information also resides on the dark web where fraudsters can create synthetic identities based on the PII from real IDs.

Synthetic identity fraud involves creating fake identities from a combination of fake information and actual ID data. A fraudster, for instance, could combine a real Social Security number with a fake address and other synthetic data points to create a false identity and then acquire a driver’s license, passport or credit card.

Account Takeover Fraud

Account takeover fraud involves fraudulently taking control of an account to access money, perform unauthorized transactions or gain entry to other accounts.

Many people use the same password for multiple accounts, so a fraudster, having accessed one account, could use the same password to take over other accounts. The account also might provide access to other linked services, such as an email account. 

SIM-swap fraud, for example, enables fraudsters to access a mobile device, gain access to email and other personal accounts, and then take over those accounts.

Chargeback Fraud

Chargeback fraud, also known as friendly fraud, is an illegitimate request to reverse credit card charges. It can be costly to a business, create reputational damage and can lead to the termination of a merchant account. 

Bank Fraud

Bank fraud is an attempt to illegally gain assets from financial institutions or their customers. Common examples include counterfeiting, check fraud or loan scams. Online banking has created new fraud opportunities, such as through mobile check deposits or falsified online loan applications.

Payment Fraud

Payment fraud involves completing a false or illegal transaction. The opportunity for bad actors to commit payment fraud cuts across almost every online transaction. It can be connected to earlier crimes, such as data theft, or it can be used to commit additional crimes, such as money laundering.

Merchant Fraud

Fake merchant accounts that appear as legitimate businesses but are just fronts for various fraud schemes are among the most common and costly forms of fraud for the financial institutions that acquire merchants.

Some merchant fraud schemes include processing illegitimate transactions; using another identity to set up a merchant account to pass AML review; processing unknown transactions for another business; or hiding the true nature of merchant activities.

The Growing Threat of Fraud

Consumers’ knowledge of mobile and online safety hasn’t necessarily grown at the same pace as the technological opportunities around them. But when organizations have a clear understanding of fraud threats and strategies for mitigation, they position themselves to better protect themselves and their customers. 

Artificial intelligence and the vast amounts of content online have created a new realm of possibilities for fraudsters. On top of that, they have access to the dark web, where they can find fraud tools, data and strategies as well as hacker groups and fraud-as-a-service offerings. 

Beyond leveraging new technology, fraudsters still have tried-and-true strategies. That includes social engineering, in which a fraudster manipulates, influences or deceives someone to gain control of a computer or password-protected sites and then continues to receive sensitive information and access.

Fraud teams focus on continually adjusting their strategies to mitigate the broad range of threats. But companies also face the challenge of balancing fraud prevention with providing the fast, convenient experiences customers expect. 

Slow onboarding can lead to customer frustration and abandonment. Signicat, for instance, found customer onboarding abandonment in financial services increased from 40% in 2016 to 68% in 2022. The research cited onboarding that takes too much time as one of the top three reasons for the increase.

Strategies to Prevent Online Fraud

Online fraud prevention is a core business competency that can flourish with a holistic, proactive approach. 

“Across all industries, organizations will need to identify and prevent new threats, including money laundering, account takeover, or identity theft,” Trulioo Chief Product Officer Micheal Ramsbacker wrote in Fintech. “Businesses are likely to be dealing with a highly complex, varied, and constantly evolving threat landscape and therefore they will be looking to work with identity verification companies that can help them to manage the broadest possible range of fraud risks.”

Here are some strategies and best practices that can help prevent online fraud.

Verify the Identity of Customers

The first opportunity to prevent online fraud is to verify the identity of customers at account opening and throughout the customer journey. You can use identity verification capabilities that leverage multiple data sources – such as biographic, document and network data – to verify customers in real time and with minimal friction.

Implement Risk-Based Authentication

Another step to prevent online fraud is risk-based authentication that adjusts the degree of verification based on the risk of each customer or transaction. Risk-based authentication analyzes various factors – such as device fingerprinting, geolocation, IP address, transaction history and user behavior – to determine a risk score and apply the appropriate authentication method.

Protect Data

A common legal requirement that also helps prevent online fraud is protecting sensitive data from unauthorized access or misuse. Data protection capabilities that encrypt, anonymize or tokenize data help ensure security and privacy. Best practices for data security – such as using strong passwords, updating software and backing up data – help companies comply with regulations.

Educate Customers

Companies that educate customers about the risks of online fraud and how to avoid it can build trust and protect users. That education includes providing customers with tips about how to recognize and report fraudulent activities, such as phishing emails, fake websites or suspicious transactions. Companies also can encourage customers to use secure passwords, enable multifactor authentication, monitor their accounts regularly and contact the company about suspicious activity.

Innovate and Adapt

Companies that innovate and adapt to the changing fraud can improve their defenses. Innovative tools and technologies that leverage artificial intelligence, machine learning and biometrics can help companies stay ahead of fraudsters.

The Tools and Technologies Help Prevent Online Fraud

Companies can monitor for fraud throughout the customer life cycle, but stopping bad actors before they enter the system helps eliminate the risk before there’s damage.

Identity Verification

When customers start the account-opening process, identity verification can flag potential fraudsters and prevent damage. Anomalies in identity information, such as outdated information or mismatches in data, can prompt further examination. By cross-referencing multiple data points and data sources for identity checks, companies create even higher barriers to fraudsters.

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 provides additional layers that help build certainty during onboarding.

Fraud Risk Management Program

A fraud risk management program gives a business a framework for identifying, assessing, mitigating, monitoring and reporting fraudulent activities. Fraud prevention isn’t just about protecting the bottom line. It also minimizes reputational harm and helps build customer trust. 

Companies can assess their fraud risk and provide fraud awareness training to ensure all employees make security a top priority.

Leverage Fraud Detection Tools

Fraud detection tools such as an address verification service and card verification value can help combat fraud from credit and debit cards. The U.S. Federal Trade Commission reports that most fraud stems from credit card, debit card, and payment apps or services. 

Take Advantage of Fraud Management Software

Many automated fraud management systems use machine learning and predictive analytics. Those technologies can allow businesses to reduce fraud by uncovering hidden correlations between people’s behavior and the likelihood of fraudulent actions.

A Holistic Approach to Fraud

Fraudsters never stop looking for a way in. Once they find it, they move quickly. 

A holistic view of customers and their transactions provides context for real-time risk-scoring. But that requires the data and analysis tools that guide verification workflows and collect and integrate information from multiple systems.

“It is crucial that fraud indicators are orchestrated into a centralized platform that can track the end-to-end life cycle of users (fraudsters or not) and generate meaningful alerts,” according to a 2022 PwC fraud report.

The goal is to evaluate the customer journey across touchpoints. Companies can optimize risk controls at those touchpoints by leveraging innovations in cloud-based systems, artificial intelligence analysis, machine learning and automated verification workflows.

Awareness of fraud techniques and prevention strategies can help build a sturdy defense. They can fortify that defense with agile, integrated, scalable fraud tools.