Real-time payments offer convenience and speed for consumers and businesses, but they also expose them to the risk of financial fraud, which can cause losses and damages. Experts say that the global digital payments transaction value will reach $9.47 trillion in 2023 and grow to $14.79 trillion by 2027. With the increasing adoption of real-time payments, especially during the COVID-19 pandemic, the opportunities and incentives for fraudsters have also increased.
In this article, we’ll discuss the cases of fraud associated with real-time software and the ways to solve this problem.
Types of Financial Fraud Connected with Real-time Payments
There are many types of financial fraud that can affect instant payments, such as:
Criminals use stolen or fake personal information, such as names, addresses, social security numbers, or credit card numbers, to open accounts, make purchases, or access funds. Identity theft can also involve phishing, which is a form of social engineering that tricks users into revealing their sensitive information through fraudulent emails, websites, or phone calls. According to Statista, the financial sector was the most vulnerable industry to phishing attacks in 2022.
Fraudsters gain unauthorized access to existing accounts, such as bank accounts, credit cards, or digital wallets, and use them to make transactions or transfer funds. Account takeover can also involve malware, which is malicious software that infects users’ devices and steals their login credentials or intercepts their online communications. Sift revealed that account takeover attacks grew by 354% in Q2 2023.
Criminals use stolen or counterfeit payment methods, such as cards, checks, or wire transfers, to make purchases or withdrawals. E-commerce online payment fraud cost merchants $41 billion in 2022, and it is expected to rise to more than $48 billion worldwide in 2023, according to a report by Juniper Research.
Payment fraud can also involve chargebacks, which are requests by customers to reverse a transaction due to fraud, dissatisfaction, or error. Chargebacks can result in losses for merchants who have to refund the payment and pay a fee to the payment service provider (PSP).
Fraudsters use real-time payments to conceal the origin or destination of illicit funds. Money laundering can involve using multiple accounts, intermediaries, or jurisdictions to transfer funds across different platforms or channels. It can also involve layering, which is the process of disguising the source of funds by using complex transactions or mixing them with legitimate funds. Almost 5% of the world’s economic output, or $800 billion, is the annual amount of money that is laundered, according to estimates.
Scammers deceive consumers into paying for goods or services that are nonexistent, defective, or different from what was advertised. Consumer scams can involve fake websites, fake invoices, fake charities, fake lottery winnings, or fake investment opportunities. In 2022, consumers lost almost $8.8 billion due to fraud and scams, up 30% from 2021.
The Impact of Financial Fraud on Real-time Payments
Financial fraud can have serious consequences for both consumers and businesses that use instant payments. Some of the impacts include:
It is expected that payment fraud will reach $40.62 billion in 2027. These losses can affect consumers who lose their money or have to pay fees or penalties for fraudulent transactions. They can also affect businesses that lose their revenue or have to pay chargeback fees or fines for non-compliance with anti-fraud regulations.
Financial fraud can damage the trust and confidence of consumers and businesses in real-time payments. This can result in lower customer satisfaction, loyalty, and retention. It can also result in negative reviews, complaints, or lawsuits that can harm the reputation and brand image of PSPs and merchants.
In 2020, Wells Fargo, a prominent financial institution and payment service provider, entered into an agreement to pay a $3 billion penalty in order to resolve both a civil lawsuit and a criminal prosecution initiated by the Justice Department related to its fake account scandal. The scandal involved Wells Fargo employees opening millions of unauthorized accounts for customers without their knowledge or consent in order to meet sales quotas and earn bonuses.
The fake accounts resulted in customers being charged fees, interest, and penalties, as well as affecting their credit scores. The lawsuit accused Wells Fargo of violating the Consumer Financial Protection Act, the Financial Institutions Reform, Recovery and Enforcement Act, and the False Claims Act. The lawsuit also damaged Wells Fargo’s reputation and trust among customers, regulators, and investors.
Financial fraud can attract the attention of regulators and law enforcement agencies who are responsible for ensuring the security and integrity of instant payments. This can result in increased compliance requirements, audits, investigations, or sanctions for PSPs and merchants who fail to prevent or detect financial fraud.
In 2020, the Financial Conduct Authority (FCA), the UK’s financial regulator, fined Commerzbank London £37.8 million because the bank didn’t have adequate AML systems and controls between 2012 and 2017. The FCA found that Commerzbank London had breached several AML rules, such as failing to conduct timely due diligence on its customers, failing to address identified weaknesses in its automated tool for monitoring money laundering risk, and failing to have adequate policies and procedures for handling high-risk customers. The FCA also found that Commerzbank London was aware of these AML issues but didn’t take reasonable and effective steps to fix them.
Financial fraud can disrupt the normal functioning of online payment systems and processes. This can result in delays, errors, or failures in processing transactions or transferring funds. It can also result in increased operational costs for PSPs and merchants who have to invest in anti-fraud measures or deal with fraud incidents.
In 2020, Wirecard, a German PSP, collapsed after admitting that €1.9 billion of its cash was missing and that it had falsified its accounts for years. The scandal disrupted the online payment services of many merchants and customers who relied on Wirecard’s platform, such as airlines, travel agencies, e-commerce sites, and fintech firms. Some of them faced delays, errors, or failures in processing payments or accessing funds, while others had to switch to alternative PSPs or refund their customers. The scandal also resulted in increased operational costs for Wirecard’s partners and regulators, who had to investigate the fraud, recover the losses, and restore trust in the online payment industry.
Software Solutions Struggling with Financial Fraud in Instant Payments
To combat financial fraud in real-time payments, PSPs and merchants need to adopt software solutions that can help them prevent, detect, and respond to fraudulent activities. Some of the software solutions include:
Fraud Detection Software
These solutions employ artificial intelligence (AI), machine learning (ML), data analytics, rules management, and other technologies to analyze online payment transactions and identify patterns, anomalies, or behaviors that indicate fraud. They can help PSPs and merchants reduce false positives (legitimate transactions that are wrongly flagged as fraudulent), false negatives (fraudulent transactions that are wrongly approved), and manual reviews (human intervention that is required to verify transactions). Some examples of fraud detection software are SEON, Riskified, Signifyd, and Revelock.
Identity Verification Software
These solutions are based on biometric authentication (such as face recognition, fingerprint scanning, or voice recognition), document verification (such as scanning passports, driver’s licenses, or utility bills), or video verification (such as live video calls or recorded videos) to verify the identity of online payment users. They can help PSPs and merchants comply with know-your-customer (KYC) and anti-money laundering (AML) regulations, as well as prevent identity theft and account takeover. Some examples of identity verification software are ComplyAdvantage, iComply, Ondato, and SumSub.
Payment Security Software
These solutions use encryption, tokenization, or other methods to protect the data and communication of online payment transactions. They can help PSPs and merchants prevent payment fraud, data breaches, and cyberattacks. Some examples of payment security software are GPayments, ThreatMetrix, and Feedzai.
How to Make Financial Fraud Prevention Software More Effective?
Sometimes, financial fraud solutions are not effective enough to stop attacks and need some improvements. For example, Deloitte offers to use AI and machine learning algorithms. The Elinext specialists have made a list of steps that will help you mitigate and address financial fraud:
- Educate users about the risks associated with instant payment systems. Encourage them to be cautious and verify the recipient’s details before sending money.
- Employ robust encryption and security measures in the payment software to protect user data. Regularly update the software to detect vulnerabilities and ensure it is in compliance with industry security standards.
- Implement various authentication methods, such as two-factor authentication (2FA) to verify the identity of users.
- Employ AI and machine learning algorithms to monitor transactions for suspicious activities. Set up alerts for unusual or large transactions.
- Set daily, weekly, or monthly transaction limits for users. Review and adjust these limits as necessary to reduce the risk of large unauthorized transactions.
- Employ risk-based approaches to assess the risk associated with specific transactions or users. High-risk transactions might require additional verification.
- Send transaction confirmation messages or emails to users whenever they make a payment. This allows users to quickly identify and report unauthorized transactions.
- Ask users to report any suspicious activity or unauthorized transactions immediately. Have a clear process in place for reporting and resolving such issues.
- Establish a responsive customer support team that can help users in case of fraud-related issues. React to complaints and disputes on time.
- Ensure that your real-time payment software complies with relevant financial regulations and standards, such as KYC and AML requirements.
- Cooperate with law enforcement agencies to track and investigate cases of financial fraud. Share necessary information and evidence to aid in legal actions.
- Safeguard user data and privacy. Ensure that personal and financial information is securely stored. Give access only to authorized personnel.
- Train your staff and users on the latest fraud prevention techniques and best practices. Stay updated on evolving fraud tactics.
- Conduct regular security audits and risk assessments to identify vulnerabilities and areas for improvement.
- Hire ethical hackers or security firms to perform penetration testing on your payment software to identify and address security weaknesses.
Real-time payments are a convenient and fast way to conduct transactions in the digital age, but they also pose a significant risk of financial fraud, which can harm both consumers and businesses. To combat financial fraud in instant payments, businesses need to adopt software solutions that can help them prevent, detect, and respond to fraudulent activities.
Nevertheless, no system can be completely immune to fraud, but a combination of preventive and responsive measures can significantly reduce the risk and impact of financial fraud associated with real-time payment software. Adapt and evolve your security measures as new threats and technologies emerge.
At Elinext, we’ve developed a lot of financial tools that have helped various businesses increase sales, increase customer loyalty, and solve other problems. If you have any questions regarding fraud prevention software, our specialists will be glad to give you a comprehensive consultation.