What Are the Top Four Types of Fraud in Banking?

The convenience of online banking and electronic transactions has significantly transformed the way we manage our finances. Along with these advancements comes an increase in financial fraud that poses a threat to both individuals and institutions. Fraudsters constantly seek new ways to exploit vulnerabilities in banking systems, necessitating a clear understanding of the most prevalent types of fraud and how to combat them with robust banking fraud detection systems.

The top four types of fraud in banking

1. Credit card fraud

Credit card fraud remains one of the most common types of financial fraud, affecting both consumers and financial institutions. Fraudsters gain unauthorized access to credit card information through various means, such as phishing, hacking or skimming devices. Once in possession of card details, criminals can make unauthorized purchases, withdraw cash or even sell the information on the dark web. The impacts of credit card fraud range from financial losses to damaged credit scores and compromised personal information.

Not only is credit card fraud a hassle for banks and consumers, organizations like retailers and ecommerce firms that accept credit cards for payment often face chargebacks from banks when fraudulent credit card transactions are disputed by the legitimate account holders. This results in costly fraud investigations and may ultimately lead to lost revenue for these organizations.

2. New account fraud

New account fraud occurs when legitimate consumers apply for a loan or credit card they never intend to repay. In addition, criminals may also use synthetic identities — fabricated identities based on a mixture of stolen and fictitious information — to provide enough information to successfully open accounts they control to steal funds.

3. Account takeover (ATO)

ATO involves fraudsters gaining unauthorized access to customer’s legitimate accounts via stolen credentials or by exploiting weak authentication mechanisms. Once inside, they can siphon funds, perform transactions, steal personal data (personally identifiable information/PII) or manipulate account details to gain full control of the account.

4. Synthetic identity fraud

Synthetic identity fraud is the use of a combination of personally identifiable information (PII) to fabricate a person or entity to commit a dishonest act for personal or financial gain. Fraudsters combine two types of identity data to create synthetic identities:

• Primary elements: Identity elements that are, in combination, typically unique to an individual or profile (e.g., name, date of birth, Social Security number and other government-issued identifiers)
• Supplemental elements: Elements that can help substantiate or enhance the validity of an identity but cannot establish an identity by themselves (e.g., mailing or billing address, phone number, email address or digital footprint)

Synthetic identities can be used to steal funds immediately or to build positive credit history for the purpose of opening more credit accounts, thereby increasing the available funds to steal.

How do you fight banking fraud?

Implementing fraud prevention and detection solutions that utilize robust data and leading analytics, banks can better combat fraud by distinguishing legitimate customers from potentially bad actors. Applied across the customer lifecycle, this helps enable smoother/more efficient customer verification and friction-right authentication to improve the customer experiences, increase conversions and reduce operational costs.