How Financial Institutions Should Combat Fraud in a Post-Pandemic World

As consumers shifted to ecommerce during the pandemic, so did fraudsters — big time. The mass migration to digital also triggered an unprecedented increase in transactional disputes. This will only increase further. Banks and credit unions must work to achieve a balance between risk management and the consumer experience.

When considering the current fraud landscape, it’s clear that consumer adoption of ecommerce skyrocketed during the pandemic. As much as 60% of U.S. payment sales can now be attributed to card not present (CNP) transactions.

Not only are consumers shifting to the CNP environment, but fraudsters are as well. In fact, CNP accounts for nearly 80% of the fraud in the U.S. today. There has been a 16% increase in online fraud attempts worldwide, and it is estimated that one in three consumers were targets of pandemic-related fraud. Categories like travel and leisure and gaming fraud saw particularly large upticks, at 155% and 393%, respectively.

The pandemic also triggered an unprecedented increase in transactional disputes. Data indicates a 100% year-over-year increase when comparing fraud and non-fraud disputes for January of 2020 and January 2021.

Two pandemic-affected categories were the largest drivers of the increase: travel, as many cardholders cancelled travel plans due to the pandemic, and non-receipt of goods, as cardholders cancelled orders due to shipping delays. One of the consequences of this is a shift in behavior as consumers are now familiar with the disputes process and more accustomed to filing disputes.

The Big Risk:

Payments where cards are not present account for almost 80% of all fraudulent transactions today.

Another challenge is the rise in “friendly fraud,” which occurs when a cardholder is seeking to recover money from a legitimate transaction by making a dispute claim. This can even extend to cardholders that are in on a fraud scheme with an accomplice who purchases the goods or services with the cardholder then claiming fraud on their account.

If the cardholder is able to successfully convince the card issuer that actual fraud has occurred, the cardholder will ultimately receive a refund. Friendly fraud is especially challenging to combat, as financial institutions run the risk of diminishing the consumer experience if a legitimate dispute is too quickly dismissed as fraudulent.

While there is a great deal of negativity to focus on in the fraud space, a bright spot in the current landscape is Automatic fuel dispensers (AFD). Overall, counterfeit fraud is decreasing, thanks to pumps finally being equipped with EMV or contactless technology. Just over 50% of AFD transactions are now chip or contactless, with that number rising to 60% for the top 20 fuel merchants.

AFD fraud decreased from 16.1 basis points (bps) in January 2020 to 11.9 bps in January 2021. For comparison, chip and contactless transaction fraud is 1.0 bps compared to 25.1 bps for magstripe transactions.

Future Fraud Trends

There will undoubtedly be more fraud moving forward. Consumers are increasingly gravitating to digital experiences, a trend that extends across all demographics. While different consumers may be utilizing digital in different ways, ecommerce and CNP transactions will continue to accelerate, which will drive online fraud numbers even higher.

We are also seeing an increase in fraudsters targeting consumers and companies directly. For example, Google is seeing a phenomenal uptick in the number of phishing sites, and fraudsters are getting better and better at making these sites look like legitimate financial institution sites.

Romance scams have also continued to rise as a result of the lockdown. From 2016 to 2020, reported dollar losses increased more than fourfold, and the number of reports nearly tripled when it comes to romance scams. Consumers are becoming more vulnerable to attack as scammers move from targeting the financial institution as a whole to also going directly after consumers. The more we can educate cardholders, the better.

Mitigating Disaster:

Banks and credit unions spend plenty working to protect customers from fraud. However, it’s imperative that institutions also do more to educate people to help reduce the risk.

Another growing challenge is synthetic identity fraud, one of the fastest-growing types of financial crime in the U.S., costing financial institutions billions of losses annually.

To help better identify and mitigate this type of fraud, the Federal Reserve announced an industry-recommended definition of synthetic identity fraud. In brief it is: “The use of a combination of personally identifiable information (PII) to fabricate a person or entity in order to commit a dishonest act for personal or financial gain.” The definition was developed by a payments industry focus group of fraud experts of which PSCU is a part.

The Federal Reserve envisions that a consistent definition for synthetic identity fraud will help the industry understand what constitutes this type of fraud and its impact on consumers, financial institutions and the overall U.S. payments system.

The Path Forward

Given the current landscape and expected future trajectory, what can financial institutions do to combat fraud?

Unfortunately, it is not as easy as simply stopping the fraud. Achieving a balance between risk management and the consumer experience is the sweet spot in combating fraud.

Banks and credit unions should consider using solutions that combine monitoring, prevention, recovery and consulting. A key element of this are AI-powered tools that link events across different platforms, individuals across different institutions, merchants across any cards and all of these points to each other.

Such tools can quickly pick up trends even if fraud has not yet taken place, enabling the institution or its partner to reach out to the consumer and proactively identify and stop fraud by being able to connect the dots better than any single entity could do on its own.

Other risk management initiatives include next-generation delinquency management solutions. These cloud-based collection and recovery platforms enable omnichannel management, and use integrated web portals for customer or member self-service collection.

New fraud alert platforms enable branded communications, so cardholders can be confident the alert is coming from their financial institution. Such platforms’ intelligent phone recognition means outreach will be tailored depending on whether the communication is going to a cell phone, digital message or email.

To address the increased challenge of disputes, financial institutions can rely on partners with this capability. For example, PSCU has a new disputes operations center that enables one-call resolution for new disputes via phone, as well as real-time updates regarding existing disputes and fraud claims. Such capabilities eliminate the help desk voicemail process, which means cardholders will get answers in real time.

Clearly digital channels will continue to grow. As an industry, it is imperative that we have the right tools and technologies in place to stop fraudsters regardless of where and how they are entering, while simultaneously ensuring a better experience, both on the fraud side and the consumer experience side.

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