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5 Types of Banking Fraud Schemes and How To Prevent Them

by Marty Aquino

Wherever there is money, there will be bad actors trying to take it from your users. According to Business Insidernearly 800,000 internet crimes were reported to the FBI in 2020, worth a loss of over $4 billion. The banking fraud numbers can be staggering, and they’re likely to keep rising as the world becomes more and more digitized. No longer does the ne’er-do-well have to be geographically nearby. 

Cyberfraudsters can now be anywhere in the world and target your organization or your users. Banks and credit unions have to be more proactive about deploying effective fraud countermeasures and prevention safeguards in order to protect the financial integrity of their end users. Here are top five types of banking fraud to be aware of.

1. Traditional Identity Theft

The rise of synthetic identity theft hasn’t deterred the classic version. Identity fraud cost Americans a total of about $56 billion last year, with about 49 million people falling victim, according to the 2021 Identity Fraud Study by Javelin Strategy & Research. About $13 billion in losses was due to what Javelin calls “traditional identity fraud, where cybercriminals steal personally identifiable information and use it for their own gains, such as through data breaches.”

In traditional identity theft, fraudsters generally contact the end user directly to steal their information. Phishing emails, robocalls and spam texts are common ways criminals have been able to scam an average of $1,100 in damages out of their victims, according to Javelin.

Potential countermeasure: Implement an up-to-date digital banking platform to upgrade or replace legacy software, because deploying real-time or rapid fixes to ever-evolving security issues on older legacy platforms is difficult and painful — when it’s possible.

2. Synthetic Identity Theft

Synthetic fraud is a more sophisticated version of identity theft. For example, a fraudster combines a stolen, but quite real, Social Security number (SSN) with fake information, such as a false name, incorrect address, made-up date of birth or new phone number, to create a false identity. Unfortunately, it’s a harder form of fraud to catch, because fraudsters will sometimes take years to build good credit under the fake alias before racking up fraudulent charges and discarding the identity.

According to a report by the Federal Reserve, synthetic identity fraud is the fastest growing type of financial crime in the U.S. Personal information often appears for sale on the black market, usually conducted online on the Dark Web. Some Dark Web-savvy individuals facilitate purchase of information like SSNs and credit privacy numbers (a nine-digit number made to simulate a SSN). Digital thieves upload personal information like SSNs to the Dark Web.

Potential countermeasure: Offer an identity-protection service that offers comprehensive protection and mitigation against all forms of fraud.

3. Friendly Fraud

Friendly fraud is where a user makes a claim to their credit card company for a charge that they made and may even have received services for; this is also known as a chargebacks. “As things stand, about one in every 2,000 online transactions results in a chargeback,” according to Mercator Advisory Group. Currently, U.S. merchants alone handle well over 50 billion transactions a year. In fact, by next year it’s estimated that merchants will see well over 33 million disputed transactions, a 32% increase from 2020.

This trend is forcing card issuers to rethink their dispute-management platforms, Mercator notes: “To keep up, any card issuer should consider evaluating its current solution with regard to speed, scalability, and versatility.”

Potential countermeasure: Deploy integrated digital tools for users to manage their payments in real time. For example, allowing them to turn credit and debit cards on and off in real time via your app helps place your bank or credit union on your user’s side rather than fostering a user vs. financial institution mentality.

4. Loan Fraud

Mortgage scams put homebuyers and owners at risk. Fraudsters attempt to take advantage of users at every stage of the legitimate process. For example, a criminal may try to redirect down payments or closing funds. This could also include wire-fraud phishing scams, where hackers may break into a title company’s email platform and reroute where the (generally irrevocable) wire funds end up by posing as an authorized official.

CoreLogic reports that an estimated 0.83% of all mortgage applications from Q2 2021 contained fraud, or roughly 1 in 120 applications. Furthermore, 37.2% national year-over-year increase in mortgage fraud risk in second quarter of 2021. According to the U.S. Federal Bureau of Investigation, more than 13,000 people were victims of internet-enabled real estate crimes in 2020, at a cost of more than $213 million. 

Potential countermeasure: Partner with strategic partners to upgrade your banking platform’s defenses, encryption and user-data safeguards.

5. Romance Fraud

Fraudsters use social media and dating apps to build a relationship with your users. They come up with a valid-sounding reason to keep the relationship virtual. After they’ve gained trust, they ask for money for something like a flight or a train ticket and then disappear. Romance scams cost consumers a record $304 million in 2020 as more people searched for love online during the pandemic, and adults 60 and older lost $139 million to romance scams in 2020, the FTC says.

In these heartbreaking schemes, criminals use fake dating profiles to bait others who are seeking romantic relationships. This method has increased because the COVID-19 pandemic has given fraudsters a convenient and continuous reason to cancel or postpone in-person meetings. Worse still, these scams can go on for months or years, potentially draining people’s life savings.

“And we’re not talking just about $1,000 or $10,000,” says Kathy Stokes, director of the AARP’s fraud prevention programs. “We had victims call the helpline who have lost half a million dollars. Once they realize that it has been a scam, they are devastated financially and emotionally. And we hear from families where these poor victims end up dying by suicide.”

Potential countermeasure: Create greater engagement with users (such as video banking, inputs and custom experiences to alert users of unusual funds activities) and provide financial advice with predictive analytics.

Combatting Banking Fraud

Fraud in its many forms exacts a terrible toll on its victims. Instead of being reactive, as is standard fare with most megabanks, your bank or credit union has an opportunity to generate deep loyalty with your end users by leveraging the insights generated by your strategic digital banking platform partners. This will not only astonish your competitors and generate high-quality business — it’s also the right thing to do.

Marty Aquino has been a passionate writer on venture capital, technology, forecasting, risk mitigation, wealth and entrepreneurial topics since 2009. He is the founder of Carbonwolf Energy, a venture-capital firm specializing in world-changing and status-quo-defying technologies and people.


Business Insider – The 5 biggest money scams financial experts have seen so far in 2021

The Federal Reserve – Synthetic Identity Fraud in the U.S. Payment System

Javelin – Total Identity Fraud Losses Soar to $56 Billion in 2020

Mercator Advisory Group – Chargebacks and Disputes

CoreLogic – CoreLogic Reports a 37.2% National Year-Over-Year Increase in Mortgage Fraud Risk in Second Quarter of 2021

Federal Beurea of Investigation (FBI) Internet Crime Compliance Center – Internet Crime Report 2020

Nasdaq – What Is ‘Friendly Fraud’ Costing Your Business?