Banking

Fraud is down, but more expensive

After increases in fraud reports in 2020 and 2021, recent data suggests the fraud rate impacting a large swath of the economy decreased at the beginning of 2022, nearing pre-pandemic levels. However, the total amount of money lost to fraud continues to climb.

The findings from TransUnion, the Federal Trade Commission, and data analysis company LexisNexis suggest fraud attempts increased with the start of the pandemic but may be receding. At the same time, fraudsters are stealing more from victims with each attempt.

TransUnion’s Q1 2022 fraud report indicates that, across sectors, the suspected fraud rate decreased 22.6% globally since the first quarter of last year. In the U.S. financial sector, it declined 56.6%. Sectors that saw increases include insurance, gambling and logistics.

The data comes from TransUnion’s TruValidate product, which tracks consumers’ device identifiers, online behaviors, personal data and more. According to Shai Cohen, senior vice president and global head of fraud solutions at TransUnion, customers “have our systems analyze their transactions for fraud indicators, and then those customers decide whether to deny, review or accept a transaction.”

TransUnion said it processes billions of transactions through its TruValidate product, which is used on more than 40,000 websites and apps. According to technology profiling company Wappalyzer, some of the companies using TruValidate include Western Union, Stripe, Citi and many non-financial companies such as Upwork and Nike.

TransUnion’s findings align with data from the Federal Trade Commission, which shows reports of fraud to the FTC decreased every quarter last year from an apparent all-time high of 824,000 reports in Q1 2021. Despite the decreases, the FTC received more fraud reports in 2021 than 2020, and related data show total losses to fraud are increasing.

The leading type of fraud, imposter scams, increased every quarter from Q2 2020 to Q3 2021, from $248 million to $652 million. During that period, the median loss from imposter scams also increased, though not as dramatically, from $800 per case to $1,000. An example of an imposter scheme is a faux romantic interest asking the victim for money, or someone claiming to be a bank employee and making false claims that the victim’s account is compromised.

To estimate the cost of fraud, LexisNexis surveyed risk and fraud executives at financial services and lending companies, 476 of which were in the U.S. and 76 of which were in Canada. The company found monthly fraud attempts on U.S. banks increased after the start of the pandemic and continued rising in 2021.

It also found the true cost of fraud per attempt increased in both periods. According to the LexisNexis survey, every $1 of lost value due to fraud last year actually cost U.S. banks $4.10, which was a 13% increase since the start of the pandemic.

“Such fraud costs involve losses related to the transaction face value for which firms are held liable, plus fees/interest incurred during applications/underwriting/processing stages, fines/legal fees, labor/investigation and external recovery expenses,” reads the LexisNexis report. “In this case, there have been increases related to labor and external recovery support.”

It’s hard to say what the recent decrease in suspected fraud TransUnion reported means for the future, and whether this pattern will continue. 

“The rate of digital fraud attempts can’t always go up and what goes up must come down at some point,” Cohen said. He emphasized that the company tracks suspected digital fraud attempts as a share of all transactions analyzed rather than the absolute number of attempts.

Cohen hypothesized that “fraudsters recognized the controls our customers put in place and went elsewhere but we believe they are just re-tooling and will be back.”

Fraudsters look for opportunities for the greatest and easiest payouts, according to Christopher Schnieper, director of fraud and identity at LexisNexis Risk Solutions. 

“This notion of fraudsters looking for different types of vulnerabilities and [opportunities for] exploitation of different organizations is something that we see,” Schnieper said. However, predicting their movements is difficult. “While we do the best we can to try to make sure that we can minimize those vulnerabilities, sometimes it can be a bit of a reactive approach.”

This reactive approach to fraud means the methods of fraudsters and fraud fighters are likely to continue evolving together into ever greater sophistication, said Raj Dasgupta, director of fraud strategy at the digital identity company BioCatch.

“Financial Institutions historically have not been able to catch up with fraudsters as rapidly as they would have liked, because of the sheer scale and novelty of the attacks,” Dasgupta said. “However, they are able to finally put in controls that manage the risk from the newer types of fraud. As a result, the fraudsters look for even newer modes of attack. This cycle will continue.”

Fraudsters follow the “path of least resistance,” according to Serpil Hall and Jim Murphy, fraud specialists at IT service management company D4t4 Solutions. A strategy financial institutions can use to resist fraudsters is implementing anti-fraud infrastructure that allows them to react more quickly to fraud attempts, according to Tommy Nicholas, CEO of consumer identity verification platform Alloy.

“The companies that are more likely to embrace that infrastructure level fraud prevention are financial institutions because it allows them to keep up with both compliance and the ever-changing nature of fraud attacks,” Nicholas said.



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