What is Fraud Detection?
Fraud has become a prevalent crime, especially in today’s fast-paced and digital environment where businesses have shifted their services. Accessing services online has made it seamless for users, however it comes with fraudulent activities as well. It is the process of recognizing fraudulent activities and necessary to prevent fraud. It plays a pivotal role in safeguarding individuals and businesses against potential financial losses and enhances overall security.
Why Fraud Detection has Become so Crucial?
Fraud detection is a broader element of Know-your-customer (KYC) and Anti-money laundering (AML) protocols and compliance with this element is compulsory to enhance security & safeguard business integrity. Businesses rely on this solution to detect and prevent different kinds of fraud like credit card fraud, payment fraud, or account takeover fraud.
- Some jurisdictions mandate certain businesses to implement robust prevention strategies, for instance, many states in the US obligate insurance service providers to establish fraud prevention measures to tackle evolving threats of fraud.
- In April 2023, the UK initiated a ‘Failure to Prevent Fraud’ offense which outlines that businesses would face serious consequences if they don’t have effective fraud prevention strategies and benefit from employment fraud. This indicates the importance of fraud prevention.
- Fraud prevention plays a crucial role in facilitating businesses to protect their customer’s financial transactions and flag fraudulent activities before their occurrence. A report by the FBI reveals that in 2022, fraud spurred a $3 billion financial loss in the US, and in 2021 the total value of financial loss reached $355 billion globally.
Cybercriminals have become sophisticated and upgraded their illicit maneuver with the rapid transition towards technological era. To stay ahead of such fraudulent activities, businesses are advised to employ robust & effective fraud prevention to avoid potential losses.
Common Types of Fraud Everyone Should Be Aware of
Fraud comes in various forms including identity theft, payment fraud, and unemployment fraud. It affects individuals and businesses differently. In contrast to individuals, businesses are exceedingly affected as they hold vast amounts of data, which may lead to severe consequences in unfortunate cases of data breaches. To effectively combat emerging types of fraud, you must have an understanding of common types of fraud affecting victims badly.
- Identity theft
It is a deceptive technique used by bad actors to steal the sensitive information of vulnerable individuals. The compromised data may include bank account details or social media account credentials. The stolen or manipulatively obtained information is utilized to get unauthorized access to services, conduct potential financial transactions, or damage the victim’s reputational image.
- Crowdfunding Fraud
Crowdfunding fraud is a pool-based fraudulent scheme in which the fraudster uses attractive and seemingly lucrative crowdfunding project ideas to the general public or a specific targeted group of investors also known as ‘backers’. Crowdfunding is a solicited financial activity in which unique business ideas and investment opportunities are presented to a group of people or everyone who wishes to invest. Fraudsters mimic this process and pose as legal crowdfunding platforms through different approaches including:
- Peer-to-Peer
- Donation-based
- Reward-based
- Lending
- Credit Card Fraud
Credit card fraud takes place when a bad actor manipulatively gets access to someone else’s credit card details. The obtained information is utilized to conduct financial transactions or fund transfers for self-interests. Individuals are advised to stay alert and report any suspicious activity to avoid later consequences.
- Phishing
Phishing attempts refer to a type of fraud where malicious actors send malicious emails or install malware to vulnerable people asking for sensitive information. The emails appear to be coming from legitimate sources and seem so authentic that individuals end up sharing their personal information. It is a form of social engineering tactics where vulnerable people are coaxed to share personal information such as username, credit card number
- Account Takeover fraud (ATO)
In an account takeover, an attacker hijacks an entire operational account of the victim. This online account can be a bank account, a social media account, online payment services, or cryptocurrency wallets. Using the acquired information, malicious actors break into online accounts and conduct multiple fraudulent activities for personal gains. ATO emerges as a potential threat to financial institutions and users, resulting in heavy financial losses.
Online Fraud Detection: Role of Artificial Intelligence & Machine Learning
Online Fraud can be detected and prevented using Artificial Intelligence (AI) and Machine Learning (ML) approaches in identity verification solutions. AI-based identity solutions can leverage new and updated facial biometrics integrated with the latest AI algorithms to detect fraudulent persons in different settings. AI-based facial recognition helps recognize anomalies in facial identities online and can detect potential criminals trying to bypass any digital system. Once a fraudulent scheme is carried out, its money needs to go into some financial institution where if a robust KYC Identity verification solution is active, there is very little chance that the criminals bypass stringent KYC checks including facial recognition and verification.
Last Word
Due to the staggering rise in AI-generated deep fake attacks and other sophisticated fraudulent tactics discussed above, fraud is becoming one of the main concerns for regulators and governments. To effectively detect and fight evolving types of fraud, it’s imperative to employ robust fraud prevention strategies such as continuous monitoring, developing fraud risk profiles, raising awareness, and reporting suspicious activities.
