5 types of fintech fraud and how to prevent them

Fraud is a growing concern for fintech companies, but technology can help limit the risks and protect your bottom line.

May 17, 2023

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Danielle Antosz

Danielle is a fintech industry writer who covers topics related to payments, identity verification, lending, and more. She's been writing about tech for over a decade and is passionate about the impact of tech on everyday life.

The average fintech company loses $51 million annually to fraud. According to a study by Javelin, the total losses to identity fraud alone amounted to $20 billion in 2022. Yet, the impact of fintech fraud goes beyond monetary losses—issues like loss of trust and increased customer friction create headaches for businesses and consumers alike. 

As we increasingly rely on digital experiences to do business, fraudsters are finding new and sophisticated ways to exploit vulnerabilities. To combat this challenge, fintech companies must implement robust fraud prevention measures that protect consumer information and prevent bad actors from stealing both money and sensitive personal information. 

Reducing the risk of fintech fraud starts with understanding the most common types of fraud. 

5 types of fintech fraud: how to protect your company

As fraudsters become increasingly sophisticated, many fintech companies are turning to technological solutions to protect their consumers and their reputations. Let's look at five common types of fintech fraud and the tools that can reduce risk exposure.  

1. Social engineering

Social engineering occurs when bad actors manipulate victims into revealing sensitive information (such as account passwords) or transferring funds, often in ways that are impossible to recover, such as via real-time payments or crypto. 

Alain Meier, Plaid's Head of Identity, explains why crypto is often such an integral part of fraud in fintech:

"Most of the resources for learning how to defraud business are going to the crypto space because if you're able to get that crypto out, it's an immutable ledger. You can't reverse that transaction."  

Say a hacker wants to access a business's payroll application. The hacker might create a fake email address similar to the payroll company’s and send an email with a subject line like, "Urgent Security Update Required". The email asks the recipient to enter their account information and sends them to a fake website. Now that hacker has access to that account and the business's money.

If this were to happen to a person or company transacting in cryptocurrency, there may be no way to recoup the stolen funds, which is why fintechs in the crypto space need to be on extra high alert. 

Preventing social engineering starts by educating employees and customers on how to spot phishing schemes. Using Plaid to connect accounts helps safeguard data with advanced encryption and tools like multi-factor authentication.

2. Presentation attacks

A presentation attack occurs when a fraudster uses someone else's physical traits or biometric data, such as a fake fingerprint or photo, to impersonate them and access their online accounts. 

Say a fraudster wants to gain access to a person's bank account, but the app uses facial recognition. To bypass facial recognition, the fraudster might use a high-quality photo or deep fake technology to create a likeness of the person. 

Then, they hold up the fake version of the victim's face to the camera during login to bypass the facial recognition test and gain access to the victim's account. The fraudster could then use this access to steal money, make unauthorized transactions, or perform other fraudulent activities on the victim's account.

Preventing presentation attacks requires a strong defense against common tactics. Plaid reduces the risk of presentation attacks using multiple forms of data validation, checking government IDs, and using advanced liveness checks to ensure the person is who they claim to be. 

→ Learn more about how Plaid Identity Verification helps prevent presentation attacks and other types of fraud

3. Synthetic identity fraud 

Synthetic identity theft occurs when fraudsters combine real personal data, such as a social security number, with fraudulent data, such as a new name or date of birth, to create a synthetic identity they can use to bypass identity verification checks when signing up for financial accounts. The most common victims of this type of fraud are children, the elderly, and unhoused individuals, as they are less likely to use credit or monitor their credit history.  

For example, someone might steal a real person's social security number and then invent a name, date of birth, mailing address, email account, and phone number associated with that legitimate SSN. 

Because it is based on real personal data, synthetic identity theft can be difficult to detect using standard fraud monitoring systems. Using Plaid Identity Verification helps mitigate this risk by using multiple sources of data to verify a customer’s personal information, verifying documentary IDs, and doing liveness checks to ensure the person submitting the information matches the ID document they provided. This makes it harder for fraudsters to get away with synthetic identity fraud. 

Guide to calculating the value of identity verification

Prevent fraud, win users, and protect your bottom line

4. Account Takeover

Account takeover (ATO) occurs when fraudsters gain access to financial accounts using methods like credential stuffing, password changes, or email changes. In 2022, ATO fraud resulted in $11 billion in losses

To commit ATO fraud, bad actors may leverage information from data breaches and then use credential-stuffing software to gain access to financial accounts. For example, a data breach from a streaming service might provide login information fraudsters can test on other accounts. Because they use bots, they can test thousands of accounts and password variations in seconds. 

Once fraudsters have access, they can change account information, locking out the rightful owners. 

The simplest way to prevent ATO is for consumers to use unique, hard-to-guess passwords for each account, however, a recent study found that 52% of consumers reuse passwords on multiple accounts, while 13% reuse the same password on every online account. That makes it easy for bad actors to gain access to sensitive information. 

Luckily, additional protections are available. For example, when bank accounts are linked via Plaid, stolen credentials are prevented from being validated using defensive services built into Plaid Link. Read more about how Plaid helps keep consumers—and fintech companies—safe from fraud. 

5. Payments (ACH) fraud 

ACH is a convenient and affordable method for businesses and consumers to exchange money. However, as ACH usage increases, ACH fraud is also on the rise. ACH fraud can occur when bad actors gain access to bank account information, which they use to fraudulently pull (debit) funds from the accounts via ACH transactions. 

Other types of ACH fraud exploit the longer processing time of ACH transactions. For example, a fraudster might fund an investment account via ACH from an account that is empty. By the time the fintech company realizes the money from the funding source account isn’t available, the fraudster has already cashed out the investment account. 

Plaid Signal can predict the risk of an ACH return in seconds using a risk-scoring model based on 60+ attributes such as account balance, ACH usage history, and the number of connections with Plaid. Using Signal makes it safer for fintech companies to fund ACH transfers immediately for low-risk transactions, as they can better tell which transactions are likely to be returned.

Fintech fraud risk can be mitigated with the right tools

While the rise of fintech has expanded financial access to millions of users, it has also increased the risk of fraud. Fintech companies must remain vigilant and proactive to protect their customers and their systems from bad actors looking to exploit the system. 

Fortunately, there are a range of tools available to mitigate this risk, including real-time fraud detection, stronger account authentication, and new customer verification. By adopting these tools, fintech companies can scale to serve more customers while reducing the risk of fraud. 

One such tool, Plaid Beacon, leverages the power of the Plaid network to stop the proliferation of identity fraud in its tracks. Watch the video below to learn how to protect your users and fight fraud with Beacon.

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