Predictive Intelligence: A Game-Changer in Mitigating Fraud Attacks on Payments

The surge of faster payments systems has inadvertently paved the way for a surge in fraudulent attacks. With new technology and faster payments coming to the forefront, fraudsters are tapping into vulnerabilities found within these schemes.

A key contributor to the surge in attacks lies in the very nature of faster payments, which involve speed and irrevocability. When payments are processed and settled in real time, users have little chance to detect the attack and reverse the transaction once it is initiated.

Furthermore, the rise of faster payment adoption among businesses and consumers gives fraudsters a wider pool to fish from, which will mean more losses in the near future.

The Many Faces of Fraud

Financial institutions must familiarize themselves with the various types of fraud to formulate the most effective strategies to mitigate attacks. Some of the most common forms of fraud are ACH payment fraud, check fraud, account takeover, and fake-merchant fraud.

As technology revolutionizes the payment landscape, FIs must play defense against potentially significant losses as well as subsequent losses of customer trust and loyalty.

An Early Warning^(R) whitepaper, Spot & Stop Payments Fraud, reveals that losses due to ACH fraud soared by 63% in 2021. And in 2022, 30% of businesses reported fraudulent activity through ACH debits and credits. More troubling was the fact that less than half of the businesses that fell victim to these attacks were able to retrieve their funds¹.

ACH payments fraud occurs when a fraudster gains illegal access to a victim’s account or a fraudulent account to generate a payment for a monthly bill pay, pay off a loan, or simply send money to their personal account in another bank. In these fraudulent transactions, FIs are ultimately on the hook for any losses incurred by the customer. If the fraud isn’t addressed, FIs can be responsible for a considerable amount in losses.

Oddly enough, with all the new innovations in payments, checks remain popular fraud vehicles. In 2022, check fraud increased by 96% from the previous year. What’s more, the average check value has risen from $673 in 1990 ($1,602 in today’s value) to $2,652 last year².

Consumer checks are mostly swiped from the U.S. Postal Service system, after which they are frequently altered to make counterfeits. Particularly troubling is a check fraud scheme whereby thieves use universal keys to access mailboxes, steal checks, and later change the payee information as well as the dollar amounts.

Business checks are not faring well, either, especially since these carry considerably higher dollar amounts and are highly lucrative targets for fraudsters. Early Warning’s report cited findings from the Association for Financial Professionals indicating that 63% of organizations fell victim to check fraud in 2022.

Account takeover (ATO) is another nefarious tactic used by fraudsters. It’s a type of identity theft whereby a cybercriminal uses stolen credentials to gain access to a legitimate account. These credentials are typically stolen through skimming, phishing, and social engineering schemes.

Losses from ATO in 2021 were a staggering $11.4 billion, a 90% increase from the year before. This fraud is particularly tricky to mitigate as the transaction originates from a real customer in good standing with the FI³.

Fake-merchant fraud happens when a fraudster masquerades as a merchant, opens a merchant account, takes payments, and ultimately steals these funds. Although this is an easier type of fraud to identify, retrieving the lost funds is nearly impossible. Consumers will then resort to initiating a charge-back, leaving FIs, once again, on the hook for the lost funds.

FIs Must Detect and Mitigate Fraud

All the aforementioned types of fraud indicate a troubling pattern. Heftier financial liability is shifting from consumers to FIs. What’s more, FIs face serious repercussions if their customers no longer feel safe conducting transactions at those banks.

This can lead to a loss of reputation, which is followed by customers, stockholders, and partners losing trust in the FI. If FIs continue this trajectory of not mitigating fraud, regulatory action through fines will be taken by governing bodies, potentially crippling the FI financially. For these and other reasons, FIs must take strategic action.

Predictive Intelligence: A Game-Changer to Prevent Payments Fraud

Although the fraud landscape may appear daunting, there is a solution. FIs can protect themselves and their customers with predictive intelligence. Predictive intelligence is the technique of using data, algorithms, and machine learning to predict behaviors or events.

Verify Payment, Early Warning’s predictive intelligence tool, is trained with information from the National Shared Database, a “consortium of shared data” provided by 2,500 FIs. This tool uses account activity data from “participant FIs” and “non-participant FIs,” generating predictive scores to indicate the probability that a payment will return unpaid, enabling inquirers to evaluate payment risk more accurately.

By stopping fraud before it starts, FIs can sidestep the monumental losses that can occur with these payment fraud schemes, keeping their bottom line and their customers safe.