Banking fraud is a significant issue that causes severe financial losses for banks, businesses, individuals, and other financial institutions. To protect your organisation and customers from becoming victims, you need to understand the various types of bank fraud and how fraudsters implement those frauds.
In this post, we will discuss various types of banking fraud and what you, as a banking firm, can do to stop fraudsters. We will also discuss how a fraud detection tool can reduce the risks of these frauds.
What Is Banking Fraud?
Banking fraud is a type of financial fraud that uses illegal methods to misuse banking institutions or its services to commit fraudulent activities. It is primarily done to gain access to financial resources, property, or any other assets owned by the bank or its customers through fraudulent means.
Fraudsters are constantly devising new methods to exploit vulnerabilities in financial systems and defraud banks and their customers for personal gain.
According to the Global Banking Fraud Index report by Seon.io, the number of monthly bank fraud attacks has been on the rise since 2022. For every $1 of fraud, US financial services pays up to $4.23 in investigation, legal, and recovery expenses.
Let us now understand the various types of banking fraud you should keep an eye out on.
What Are the Different Types of Fraud in Banking?
Here are the top 14 most common types of banking frauds, ranging from minor scams to large ones.
Types of banking fraud
1. Account Takeovers
As the name suggests, fraudsters take ownership of the victim’s online banking accounts using stolen credentials in account takeovers or ATO frauds. They gain unauthorised access to the bank account through phishing attacks, data breaches, or by purchasing the credentials on the dark web and then committing bank account fraud.
Fraudsters may transfer funds to another account, withdraw money, make fraudulent payments, or request credit cards in the victim’s name. Once done, they might change the login credentials to lock the actual account owner out of the account.
For instance, scammers often hijack bank accounts to move money into their own or purchase high-value items for resale, creating a scheme that is nearly impossible to trace. It’s alarming that each year, around 22 million U.S. adults fall victim to account takeover (ATO) fraud, with average losses reaching $12,000. The prevalence of ATO fraud is indeed increasing.
2. Card Skimming
Scammers employ card skimming techniques to capture credit or debit card details from unsuspecting victims for illicit transactions. They attach specialised devices to ATMs, point-of-sale terminals, or other payment systems to read the data encoded on the card’s magnetic strip. These devices scan and store the card information locally before transferring it to computers for fraudulent use. Additionally, they may set up small cameras near keypads to record PIN entries. According to a FICO survey, over 161,000 cards were compromised by skimming last year—nearly five times the number reported in 2021.
3. Credit Card Fraud
Fraudsters might steal physical credit cards or their details for personal gain. They can also use stolen information or counterfeit documents to apply for new credit cards in someone else’s name and make purchases using those funds. Taking advantage of the substantial credit limits assigned to victims leads them into a cycle of debt since these borrowed funds must be repaid with interest. Another prevalent form of fraud involves contactless payment scams where criminals intercept NFC-enabled transactions during payment processing or discreetly access the chip itself; because contactless payments don’t require PIN verification, scammers can make multiple purchases until a PIN becomes necessary.
4. Cheque Fraud
Cheque fraud refers to the act of utilising forged or fake cheques for illicit financial benefits. This typically involves withdrawing money from bank accounts through unauthorised means, such as depositing these cheques into accounts without consent or modifying the cheque’s payment amount. Criminals may also employ counterfeit cheques to make deposits into bank accounts. Typical forms of cheque fraud include:
– Cheque Kiting: This scheme involves writing cheques from accounts that lack sufficient funds and depositing them into another account to cover the deficit before the original cheque clears.
– Altered Cheques: Here, fraudsters change the amount stated on a legitimate cheque.
– Cheque Theft: In this case, criminals steal completed cheques from victims and use them as if they were their own.
– Cheque Forgery: This involves creating a fraudulent cheque using someone else’s account details.
– Cheque Counterfeiting: Fraudsters produce fake cheques that look genuine in order to steal funds.
Verifying signatures for authenticity is crucial, and employing AI technologies like Signature Detection can help prevent fraud. Additionally, there’s a method known as cheque washing, where perpetrators apply specific chemicals to erase ink on a cheque and rewrite it with new information.
5. Phishing
Phishing, often referred to as fraudulent emailing, occurs when scammers send deceptive emails aimed at persuading victims to divulge their personal and banking information. These communications are crafted to look like they originate from legitimate banks. Typically, they include dubious links designed to capture sensitive data such as login credentials, one-time passwords (OTPs), credit card numbers, and more. For instance, scammers might email individuals urging them to renew or upgrade their credit cards via a provided link. When victims click on this link, they are prompted to input their credit card number along with its expiry date and CVV code. The fraudsters then store this information in their databases for malicious use once submitted.
6. Money Transfer Fraud
Scammers engage in money transfer fraud, also referred to as funds transfer fraud (FTF) or wire transfer fraud, to hijack legitimate money transfers and reroute the funds to their accounts. In some cases, these criminals obtain victims’ banking credentials and access their accounts to transfer money directly to themselves. Beyond simply stealing money, they also utilise wire fraud for illicit activities such as money laundering, tax evasion, and bribery. For instance, they often exploit emotional appeals to persuade unsuspecting individuals into making donations through wire transfers by operating fake charitable organisations that manipulate people’s compassion for financial gain.
7. Fraudulent Loan Applications
Another tactic employed by scammers involves submitting fraudulent loan applications to financial institutions in order to secure funds unlawfully. They may provide incomplete personal details or falsified documents regarding their income, assets, and bank statements to bolster their requests for loans. Scrutinising these counterfeit bank statements is vital for preventing such fraudulent applications. This type of fraud encompasses various schemes, including mortgage fraud, payday loan scams, personal loan deception, and loan stacking, among others. The primary goal of these fraudulent loan activities is to acquire a more significant sum of money with the intention of defaulting after the funds have been released.
8. OTP Fraud
One-time passwords (OTPs) play a crucial role in two-factor authentication and securing online transactions; however, scammers have successfully deceived numerous individuals into disclosing their OTPs, leading to significant theft from their bank accounts. In addition to OTPs, criminals can also collect sensitive information such as login credentials, user IDs, card numbers, and personal data like birth dates or addresses through deceptive phone calls. These con artists often pose as representatives from banks or other financial entities and coax victims into sharing confidential information over the phone—a scheme commonly known as vishing or phone call scams.
9. Impersonation Fraud
Impersonation fraud occurs when criminals pose as representatives from banks or law enforcement to deceive victims into revealing their private information. They create scenarios that seem urgent and convincing, making the victims believe they are dealing with a reliable source. In some cases, these fraudsters may even impersonate the victims themselves to access their bank accounts and execute unauthorised transactions. For instance, they may steal someone’s identity to open bank accounts in that person’s name without permission, which can then be exploited for illegal activities such as securing loans, transferring stolen money, laundering funds, and more. Advanced technologies like Deepfake Detection APIs can assist in identifying these sophisticated scams, providing an additional safeguard against impersonation fraud. Learn more about how Deepfake Detection can combat identity theft.
10. Spoofing
Spoofing involves creating counterfeit websites that resemble legitimate bank sites to commit fraud. Scammers replicate the brand name, logo, graphics, and other elements of authentic banking websites to mislead victims into thinking they are on a secure platform where they can safely enter sensitive information like account details or credit card numbers. These fraudulent sites often appear very similar to real ones; however, upon closer inspection, discrepancies in logos or misspellings in the brand name may reveal their true nature.
11. Smishing
Smishing is a phishing method where criminals send deceptive text messages to lure individuals into divulging sensitive banking information or clicking on harmful links, leading to fraudulent websites. The term smishing is a blend of SMS (Short Message Service) and phishing. Scammers use SMS messages to inform people about supposed updates regarding their bank accounts or requests for new credit cards while attempting to extract personal data through these communications.
12. Malicious Software and Imitation Applications Just as with website spoofing, scammers create counterfeit applications that closely resemble genuine banking apps to trick customers. These fraudulent apps often harbour malware, viruses, or other harmful software designed to capture sensitive banking details and provide unauthorised access to victims’ online accounts. Additionally, these malicious applications can facilitate the transfer of funds from the victim’s accounts to those of the fraudsters.
13. Prime Bank Scams Prime bank fraud refers to a deceptive investment scheme wherein con artists establish fictitious banks to entice investors into their financial products. They promise unrealistically high returns on investments within a short timeframe. To lend credibility to their schemes, they produce fake documentation such as phoney bank statements, forged financial records, and counterfeit signatures.
14. Fraud Committed by Employees As indicated by the term itself, employee-initiated fraud occurs when bank personnel exploit their access to confidential customer data and banking systems for personal benefit. This type of fraud can include resource manipulation, embezzlement, forgery, bribery, and data theft. According to the Association of Certified Fraud Examiners (ACFE), businesses lose approximately 5% of their revenue annually due to internal fraud perpetrated by employees who often face financial hardships. For instance, a corrupt bank employee might execute unauthorised transactions like money laundering using access gained through dormant accounts.
How Can Financial Fraud Be Detected?
Now that we understand various forms of banking and financial fraud, let’s explore practical strategies for identifying them.
1. Perform Data Analysis Analyzing data is crucial for spotting fraudulent activities by recognising patterns indicative of such behaviour. This process involves gathering and categorising both structured and unstructured data in order to uncover anomalies or irregularities that may signal fraud.
2. Track Financial Transactions Keeping an eye on financial transactions is a crucial method for uncovering potential fraud and bringing it to attention for further examination. Employ a dedicated transaction monitoring system to scrutinise financial activities in real time, pinpoint suspicious behaviour, and notify the appropriate team for deeper investigation. Keep watch over bank accounts for any irregular transaction trends. Sudden increases in withdrawal or transfer activity suggest that fraudsters are exploiting the account to siphon funds. By identifying fraudulent actions early, you can avert more significant problems and safeguard both your organisation and its clients from falling victim to scams.
3. Examine Financial Reports Financial reports serve as key indicators of possible fraudulent behavior. Regularly review and assess these statements to spot unusual changes or inconsistencies in financial performance. Utilise a bank statement analysis tool that provides features like trend analysis, ratio analysis, and comparative analysis to detect patterns and discrepancies within financial documents. Additionally, consider conducting independent audits on high-risk clients by engaging a third-party auditor to search for signs of fraud.
4. Maintain Regulatory Compliance Adhering to regulatory standards plays a vital role in proactively managing risks and preventing fraudulent activities. By following applicable laws, regulations, and ethical guidelines, you foster a compliant environment that mitigates the chances of legal repercussions, financial setbacks, and damage to your reputation due to fraud incidents. For instance, compliance with data protection laws ensures responsible management of customer information while minimising the risk of unauthorised access.
5. Inform Your Clients It’s essential to educate your clients about the various forms of banking fraud and their potential consequences. Motivate them to set up robust passwords and activate two-factor authentication for their banking accounts. Advise them to be vigilant regarding emails and the links contained within them. Remind them that your bank will never request sensitive banking details through phone calls or messages at any time.
Challenges in Detecting Banking Fraud It’s evident that the prevalence of banking fraud is increasing, posing significant risks to the entire financial sector. Here are three primary challenges that many banks encounter in fraud detection:
High Volume of Monitoring With millions of transactions processed daily, spotting fraudulent activities can be nearly impossible. Additionally, criminals are continuously devising new strategies to exploit weaknesses in the banking system, often circumventing current security protocols. Therefore, banks must consistently enhance their security measures and fraud detection systems to outpace these threats.
Customer Onboarding While it is crucial to implement rigorous security measures—such as multiple authentication steps, regular KYC updates, biometric verification, and lengthy onboarding processes—these can frustrate legitimate customers. This may result in negative customer experiences and potentially lead to a loss of clientele.
Technological Investments Modern fraudsters use advanced technologies and platforms for their illicit activities, including phishing, hacking, malware attacks, etc. Each fraudulent attempt varies from the previous one, complicating early detection efforts. Relying on outdated technological infrastructures proves ineffective against emerging threats; hence, banks are under pressure to invest in innovative technologies and continually update their systems for enhanced fraud detection capabilities.
How Can AI Assist in Identifying Financial Fraud?
Artificial intelligence (AI) and machine learning play a crucial role in aiding banks to fight against fraudulent activities. Approximately 88% of banking leaders believe that minimising fraud is the most effective approach to addressing financial crime, and they see AI and machine learning as the optimal solution. These technologies detect bank fraud through various methods, including recognising patterns and trends within financial data by employing sophisticated techniques such as anomaly detection, trend analysis, and comparative analysis. This analytical process facilitates quicker identification and management of fraudulent activities while also streamlining manual procedures through automation. For instance, instead of depending on traditional customer verification methods, one can utilise advanced tools for document analysis, biometric checks, and other forms of identity validation.
Fraud Detection
As banking fraud continues to evolve relentlessly, it is vital to remain alert and take proactive measures to safeguard both your institution and its customers. Tools powered by AI and machine learning provide a flexible approach to combatting fraud effectively by automating detection processes that help identify risks early on.
Maxthon
Maxthon has embarked on an exceptional journey in the fast-paced world of technology, driven by a steadfast dedication to protecting web applications and the essential personal data of its users. Central to this endeavour is an impressive suite of advanced encryption methods that act as a strong defence against potential threats that could jeopardise the integrity of information shared between users and various online services. As individuals navigate their digital lives—whether entering passwords or divulging personal details—they can do so confidently, knowing that Maxthon secures their sensitive information through encrypted pathways, effectively thwarting any unauthorised access attempts.
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