Fraudulent transactions 101: What causes them and how businesses can act


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  1. Introduction
  2. What is a fraudulent transaction?
  3. Types of fraudulent transactions
    1. Credit card fraud
    2. Identity theft
    3. Check fraud
    4. Wire fraud
    5. Online payment fraud
    6. Mortgage fraud
    7. Insurance fraud
    8. Investment fraud
  4. Why do fraudulent transactions happen?
  5. How to prevent fraudulent transactions
  6. How Stripe solutions detect and prevent fraudulent transactions

According to a 2022 LexisNexis study, each dollar of fraud cost US businesses an average of $3.75, a figure that is expected to continue growing. But beyond financial loss, secondary effects of fraud—including reputation damage and the loss of customer trust—can affect a business’s long-term success.

With the rapid rise in global ecommerce and digital transactions, there are more opportunities for cybercriminals to exploit weaknesses in security systems and take advantage of unsuspecting victims. As the methods employed by fraudulent actors become more sophisticated, businesses must evolve their strategies to mitigate risks and prevent financial loss.

In this article, we’ll discuss the different types of fraudulent transactions, the conditions that create opportunities for a high volume of fraudulent transactions, and the steps businesses can take to prevent, detect, and respond to these attacks.

What’s in this article?

  • What is a fraudulent transaction?
  • Types of fraudulent transactions
  • Why do fraudulent transactions happen?
  • How to prevent fraudulent transactions
  • How Stripe solutions detect and prevent fraudulent transactions

What is a fraudulent transaction?

A fraudulent transaction is an unauthorized or illegal activity involving the use of payment instruments or financial systems, typically for the purpose of obtaining money, goods, or services without proper consent or authorization from the account holder. This type of transaction often involves identity theft, stolen payment information, or deception and is intended to deceive and cause financial harm to the account holder, business, or financial institution.

Types of fraudulent transactions

There are many types of fraud that can occur within financial systems. Here are a few examples:

Credit card fraud

Unauthorized use of a credit card or its information to make purchases, withdraw cash, or transfer funds without the cardholder’s permission. Common types include:

  • Card-not-present (CNP) fraud: Card-not-present fraud occurs in online or phone transactions where the physical card is not required.
  • Skimming: Fraudulent actors steal card information using skimming devices installed on ATMs or point-of-sale terminals.
  • Counterfeit cards: Counterfeit cards are fake cards using stolen card information.

Identity theft

Identity theft is the act of impersonating someone else to gain access to their financial accounts, obtain credit, or make transactions without their knowledge or consent. This may involve using stolen personal information, such as Social Security numbers or birthdates.

Check fraud

In this scenario, fraudulent actors use altered, counterfeit, or stolen checks to withdraw funds or make payments without authorization. Tactics include:

  • Forged checks: Creating fake checks, using someone else’s account information.
  • Check washing: Removing information from a legitimate check and replacing it with fraudulent details.
  • Stolen checks: Using checks that were taken without permission from the rightful owner.

Wire fraud

Wire fraud is unauthorized use of electronic communication or financial systems to transmit funds, often through false pretenses or misrepresentation. This may involve phishing scams, business email compromise (BEC) schemes, or other methods of deception.

Online payment fraud

Online payment fraud consists of unauthorized transactions via online payment platforms or digital wallets. This may include account takeovers, phishing scams, or using stolen payment information.

Mortgage fraud

Mortgage fraud is providing false or misleading information on a mortgage application to obtain a loan or better loan terms. This can involve income misrepresentation, inflated appraisals, or fraudulent documents.

Insurance fraud

Fraudulent actors make false claims or provide misleading information to an insurance company to receive undeserved benefits or payments. This can involve staged accidents, exaggerated damages or injuries, or false documentation.

Investment fraud

Investment fraud is manipulating investors or financial markets with deceptive practices, such as selling fraudulent investments or securities. Common types of investment fraud include Ponzi schemes, pump-and-dump schemes, and insider trading.

Businesses and customers should assume that types of fraudulent transactions will increase in number and evolve as technology and globalization continue reshaping our economies and payment systems.

Why do fraudulent transactions happen?

With the recent increase in fraudulent transactions, you might wonder which conditions enable this type of fraud. Understanding the underlying motivations and systemic conditions is an important step in building a plan to protect your business. Some common drivers of fraudulent transactions include:

  • Financial incentives: Monetary gain is the primary motivation for most fraudulent actors. Perpetrators may be enticed by the prospect of acquiring funds, goods, or services without paying for them or by making a profit through illegal means.

  • Technological advancements: The increasing sophistication of technology has provided fraudulent actors with new tools and opportunities to commit fraud. Cybercriminals can exploit security vulnerabilities, develop malware, or use social engineering techniques to gain access to sensitive financial information.

  • Anonymity: It’s easier for fraudulent actors to operate anonymously on the internet and with digital transactions, making it more difficult for authorities to identify and apprehend them.

  • Information accessibility: The widespread availability of personal and financial information through data breaches, social media, and public records makes it easier for criminals to gather the data needed to commit identity theft and other types of fraud.

  • Financial system complexity: The intricate nature of financial systems creates opportunities for fraudulent actors to exploit weaknesses or gaps in security, regulation, and oversight.

  • Lack of awareness: Many customers and businesses may not be fully aware of the risks associated with fraudulent transactions and the importance of ample security measures, making them more vulnerable to fraud.

  • Social engineering: Fraudulent actors often use psychological manipulation techniques to deceive their victims, taking advantage of trust or authority to extract sensitive information and gain unauthorized access to accounts.

  • Weak security measures: Insufficient security protocols, outdated systems, and weak authentication processes can make it easier for criminals to breach accounts and commit fraudulent transactions.

How to prevent fraudulent transactions

Businesses must proactively prevent, detect, and respond to fraudulent transactions to safeguard their financial assets, protect customer data, and uphold their reputation. Implementing a comprehensive fraud management strategy can minimize the risks associated with fraudulent activities.

The approach each business should adopt depends on its unique needs and vulnerabilities, but here are steps that most businesses should take:

  • Implement robust security measures
    Implement state-of-the-art security technologies to protect sensitive data and systems. This may include using multifactor authentication (MFA), encryption, and secure communication channels and regularly updating software and systems with the latest security patches.

  • Employee training and awareness
    Establish a comprehensive training program to educate employees about common fraud schemes, red flags, and best practices for safeguarding sensitive information. Foster a culture of security where employees feel empowered to report suspicious activities and incidents.

  • Monitor transactions and accounts
    Use advanced fraud detection tools, such as artificial intelligence (AI) and machine learning algorithms, to identify unusual patterns or anomalies in transaction data. Implement transaction limits, velocity controls, and regular account reviews to swiftly detect and mitigate high-risk transactions.

  • Implement strong internal controls
    Develop and maintain a system of checks and balances within your organization to minimize the risk of internal fraud. This may involve segregating duties, conducting background checks on employees, and regularly auditing internal processes and controls.

  • Enhance customer verification processes
    Implement rigorous procedures to verify customer identities and prevent account takeover or identity theft. Collaborate with third-party databases or credit bureaus to validate customer information.

  • Collaborate with other businesses and financial institutions
    Forge strong relationships with other businesses and financial institutions to share information on fraud trends, prevention strategies, and best practices. Engage with industry associations or organizations dedicated to combating fraud to stay ahead of emerging threats.

  • Develop a fraud response plan
    Develop a well-defined fraud response plan, including clear protocols for investigating and addressing fraudulent activities. Designate a dedicated fraud response team who is responsible for managing incidents and liaising with law enforcement agencies, if necessary.

  • Maintain clear communication with customers
    Inform customers about potential fraud risks and encourage them to monitor their accounts vigilantly. Offer guidance on how they can protect themselves from fraudulent activities, such as creating strong passwords and exercising caution with personal information.

Taking these steps can empower businesses to create a more secure environment that’s more difficult for fraudulent actors to penetrate. For more detail about taking an aggressive, global approach to detecting and preventing ecommerce fraud, read more here.

How Stripe solutions detect and prevent fraudulent transactions

Stripe Radar is an integral component of Stripe’s comprehensive suite of payment solutions, working with Terminal, Checkout, and Connect to provide businesses and platforms with robust fraud detection and prevention capabilities. With these integrated solutions, Stripe offers a unified approach to combating fraudulent transactions while ensuring a simple payment experience.

Here’s a brief overview of how these solutions work with Stripe Radar to fight fraudulent transactions on multiple channels:

  • Stripe Terminal
    Stripe Terminal provides businesses with the tools to build customized, secure, and scalable in-person payment experiences. Radar’s advanced machine learning models and fraud detection capabilities are integrated with Terminal, enhancing security for both card-present and card-not-present transactions. This ensures that businesses can protect themselves from fraudulent activities, whether online or in-store.

  • Stripe Checkout
    Stripe Checkout is a prebuilt, customizable payment page designed to streamline the online payment process for businesses and their customers. By incorporating Radar’s real-time fraud detection and prevention features, Stripe Checkout minimizes fraudulent transactions without adding friction to the user experience. Businesses can use Radar’s dynamic rules engine and customizable risk thresholds to tailor their fraud prevention strategies according to their specific needs.

  • Stripe Connect
    Stripe Connect is a powerful platform that allows businesses to build and scale complex payment ecosystems, such as marketplaces, gig platforms, and subscription services. Connect integrates seamlessly with Radar, providing a consistent fraud prevention solution across all transactions and participants. This ensures that platforms and their users can benefit from advanced fraud detection while maintaining a secure and trusted environment.

This holistic approach enables businesses to effectively detect, prevent, and respond to fraudulent transactions. Furthermore, the seamless integration of Stripe’s payment solutions ensures a consistent experience, helping businesses focus on growth and success in an increasingly competitive digital landscape.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.

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