Lipis Advisors: Get Your Head Out of the Sand — Best Practices in Fraud Prevention

Fraud is an ongoing problem with no ‘silver bullet’ solution

Fraudsters are constantly looking for new ways to steal money. The rise and increased use of instant payment systems has unfortunately enabled fraudsters to steal money and move it faster than ever before. But this does not mean that fraud is limited to instant payment or account-based systems; card-based fraud is still increasing in many markets around the world.

Effectively preventing fraud as well as identifying bad actors and recovering ill-gotten funds requires cooperation among payment system stakeholders. And while technology can be exploited by bad actors, so, too, can it be used to protect individuals, businesses, and organizations. This article will present thoughts about fraud, the challenges involved in preventing it, and various countermeasures for combatting it.

Before diving into fraud prevention solutions, it is important to define fraud itself and to differentiate between various types. There are two main categories of fraud widely recognized by organizations such as the European Payments Council (EPC),[1] the Federal Reserve (FED),[2] and the World Bank[3]: unauthorized and authorized fraud. Unauthorized fraud has been known as account takeover in push payment systems or unauthorized transactions in pull payment systems and has historically been the focus of most fraud prevention measures. The fraudster gains access to the victim’s account and transfers money from the victim’s account without the victim’s knowledge. This is typically done in any number of ways, such as phishing, malware, business email compromise (BEC), etc.

An authorized fraud is committed when the victim is convinced to send money to the fraudster. The fraudster may deceive the victim as to their true identity by pretending to be a friend, family member, colleague, romantic partner, etc.; the perpetrator may pretend to either have something the victim wants to purchase, such as a used bicycle or expensive sunglasses; they may convince the victim they can help them earn even more money, such as by “investing” in a get-rich-quick scheme. 

Anti-Fraud Solutions

Preventing fraud requires considerable cooperation and investment in technology at the financial institution and network operator levels. Additionally, scheme rules, regulation, and education all have important parts to play. This section will go through four key methods of combatting fraud: technology-based solutions, payment scheme-based solutions, regulatory solutions, and education- and awareness-based solutions. No complete solution fits neatly into only one category. The emphasis should be ...

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