Payment fraud evolves fast – can we stay ahead?

Payment fraud happens when someone with ill intent steals another person’s private payment information – or dupes them into sharing it – then uses that information for a false or illegal transaction. Every time a new payment method or service gains popularity, the payment landscape changes. And so do the fraudsters. They adapt to each new trend by developing new and increasingly sophisticated payment fraud schemes. 

Fraudsters rely on the weakest link in the chain of events leading up to payment fraud – people. Anyone who makes payments or uses payment services is a potential target. Unfortunately, it’s not hard for criminals to manipulate people as they work to achieve their nefarious aims.

Across the globe, fraudsters have rapidly adapted, migrated and scaled their fraud tactics by taking advantage of organizations and individuals who aren’t prepared. If present trends continue, Juniper Research says online payment fraud losses are likely to climb as high as $48 billion by 2023. And that’s just the tip of the iceberg.

What can organizations do to outsmart criminals and stay ahead of new payment fraud tactics? Before we consider the answer, let’s look at what’s new in the world of payments and see why new types of payment services have opened the door to new fraud threats.

New payment trends create new fraud challenges, threats

Today’s payment ecosystem has broadened well beyond traditional banks, with fintechs, challenger banks and payment service providers (PSPs) pushing a variety of new, innovative payment services. At the same time, we’ve seen huge growth in the number of instant (or “immediate”) payments. Such payments take seconds or less from initiation to settlement. 

When the pandemic thrust the world into digitalization, payments became increasingly cashless and opened doors for new, faster payment types. But, with all the innovation comes new fraud threats – and they are emerging on different timelines in different parts of the world.

A new threat in one region gives organizations in other regions an opportunity to learn from those who have gone before – but it presents an equal opportunity for fraudsters. Fraud happens faster today because fraudsters export models that worked in one region to another region that's adopting similar technology. Organizations caught behind the curve pay a heavy price.

Consider the context around some of the more pressing challenges:

• Instant (immediate) payments mean immediate fraud. That’s because fraud attacks scale quickly – and losses grow exponentially. To respond rapidly, organizations must have appropriate fraud processes in place. Using a purely rules-based detection approach leaves organizations exposed because it takes days to implement changes.
• Evolving digital payments – such as mobile wallets, person-to-person (P2P) and overlay services – create new opportunities that fraudsters can exploit. Fraud and risk teams lack experience and historical data around these emerging payment options, making it nearly impossible to fight fraud with traditional rules-based fraud solutions. And, in the push to go live with new payment services like open banking, fraud controls sometimes get left behind.
• Money mules grow along with payment fraud. Money mule accounts are set up to receive and launder illicit funds (often uncovered via anti-money laundering efforts). Such accounts create issues for banks and PSPs in terms of managing their new account onboarding processes. The prevalence of such accounts also requires banks to have processes in place that identify, manage and close down accounts misused by money mules.
  

Banks and PSPs need to move to a 24x7 fraud response. Instead of taking days to investigate a suspicious payment alert, they need to manage alerts in real time. It’s imperative to make quick but accurate decisions as customers make instant payments. Today’s customers expect immediate resolution when payments are delayed or disrupted.  

The role of regulators and open banking, standardization and interoperability

Regulators are heavily involved in and affected by changes in the payment landscape. Consider the regulatory challenges of open banking, for example.

The open banking model uses APIs to give third-party financial service providers open access to consumers’ financial data from banks and other transactions at different types of organizations. With open banking programs underway around the world, regulators must oversee many banking and payment services that have expanded to include new participants.

Another example is the EU’s payment services directive (PSD2), which has created disruptions in the payment ecosystem. Regulators around the world are pursuing similar options in their regions.

Other factors

Standardization and interoperability are also relevant to the success of payment schemes and overlays crossing national and regional boundaries. Although these efforts are underway, the payments market remains fragmented along national and regional lines – much more so than card payments. No doubt we will continue to see movement in this space, such as:

• Changes like the ISO 20022 payment messaging standard.
• Schemes like P27 (pan-Nordic payment scheme) and SWIFT gpi, which will help move immediate payments beyond national to regional and global multicurrency services.

Amid the whirlwind of innovation lies many opportunities and challenges. How does this fast-paced environment affect the fraud space? 

Stay aware, stay nimble – Key tips for banks and PSPs

Just as criminals have adapted their methods, banks and PSPs need to adapt their responses so they can target anomalous customer behavior more effectively. For example:

• Incorporate adaptive real-time fraud detection systems for both outbound and inbound payments.
• Take a more holistic view of payer and payee accounts to more effectively target money mule accounts. 
• Use adaptive machine learning techniques and behavioral profiling to identify and spot anomalies in customer behavior. This makes it faster and easier to recognize genuine customers.

The payment landscape is ever-changing, and the evolution presents promising opportunities for the financial industry. But awareness of potential new fraud threats must be considered with equal importance as new innovations are adopted. Banks and PSPs need to evolve by using advanced analytics that can quickly adapt and learn to spot anomalies from behavioral indicators.