COMMENTARY: Here Are the Key Factors Driving Digital Fraud in 2020

Over the last 24 months, organizations across the globe have experienced $42 billion in total fraud losses. An increasing number of businesses report higher losses related to fraudulent identities year over year, according to a report from Experian, from 51% in 2017 to 57% in 2019. Here are some of the underlying factors driving the increase in digital fraud.

To start with, fraud techniques and approaches are becoming more sophisticated and harder to stop. 

Synthetic identity fraud is a $6-billion-per-year problem. The widespread availability of stolen PII (personally identifiable information) allows fraudsters to combine real and fake data to create new identities that are harder to detect. Savvier criminals play a long game, building up a history of legitimate transactions over time to improve the chances that a synthetic identity will be authorized for larger purchases or credit lines down the road. Then, they simply stop paying.

Fraudsters have become adept at account takeover, using passwords and credentials obtained via data breaches or social engineering to gain control over accounts and steal assets, make purchases, or rack up massive debts. This tactic is rampant across the entire digital commerce landscape.

The benefits of machine learning and cloud-based computational power cut both ways. Cheap, on-demand computational power allows criminals to commit fraud on a global scale, while machine learning enables them to deploy subtler algorithms capable of gaming fraud-detection systems. Older, rules-based and manual-review fraud-prevention systems simply struggle to keep up.

Also, the changing retail and e-commerce landscape is creating more opportunities for fraud.

With more commerce shifting to online, card-not-present (CNP) credit and debit card transactions have increased dramatically in recent years. A recent study found that CNP transactions already accounted for 27% of all debit transactions in 2019 and were increasing at a rate 10 times higher than card-present transactions. And that was before Covid-19 pushed even more commerce online.

Consumers have embraced the digital channel in everything from social networks, dating apps, food delivery, alternative transportation, and vacation rentals to online auctions and selling. The sheer number and widespread popularity of new marketplace platforms and services offer more opportunities for fraudsters to exploit. 

At the same time, point-of-sale lending is becoming increasingly common, even for smaller purchases. Merchants are offering installment plans or loans for everything from $50 sweaters to $5,000 home-fitness equipment, with consumers expecting approval in minutes.

Meanwhile, banking and payments have moved online.

Traditional banks are going digital and responding to consumer demands for online, and especially mobile, services. As they de-emphasize in-person transactions, banks are doing more account onboarding and transaction approvals online. This makes it harder to verify identities.

A new breed of “challenger banks,” born and doing business entirely in the online world, is competing with traditional banks for the business of consumers. They seek to differentiate themselves by their ease of use and digital native experiences. One area of focus for these institutions is the large number of consumers who are underbanked or who have “thin file” credit histories. Less data increases the risk of fraud.

Peer-to-peer payment and e-wallet apps are widely used in Europe and Asia and increasingly popular in the United States, with 71% of Americans in a recent survey saying they have made a P2P payment. Whether it’s paying for services from a local vendor or an online bidding site, digitally splitting a dinner check with friends or sending money to a family member in another country, P2P payments and remittances have reached a tipping point. But with over half of P2P transactions taking place between consumers and an entity they don’t know, the potential for fraud is high.

Finally, consumers want fast, frictionless digital experiences. 

Consumers will often abandon transactions that take too long, require too much data, or are too complex. Yet, they fully expect their data to be secure. And while banks, retailers, and others want to prevent losses, they also don’t want to reject good customers and transactions due to overly zealous fraud-prevention measures. Cyber criminals are adept at understanding and taking advantage of the fraud tolerance of those they want to steal from.

All of these factors contribute to the rise in digital fraud. For merchants, banks, payment providers, and others, staying ahead of fraud requires a multilayered approach. Analyzing global digital identity data and transaction patterns with systems based on artificial intelligence can provide an early warning of potential risks without compromising on consumer expectations for speed, convenience, and security.

—Jordan Reynolds is head of e-commerce and marketplace strategy at Ekata Inc.