According to this research, global fraud increased by 18% in 2022, as compared to 2021 — a trend driven in large part by the acceleration of digital services and activity due to the pandemic, as well as rising geopolitical tensions and an uncertain economic landscape.
In this post, we’ll walk through seven financial fraud trends to look out for in 2023, as well as the steps banks and financial institutions can take to protect their customers and their business.
Document fraud continues to be a key tactic used by fraudsters as their document forgery techniques continue to become more sophisticated. According to Inscribe data, 50% of manipulated documents submitted to SMB lenders in 2022 matched the pattern of first-party fraud rather than third-party fraud — where the identity was unchanged, but indicators of financial health were tampered with. And more than 30% of manipulated documents submitted to personal lenders matched the pattern of first-party fraud.
The top two document types manipulated in 2022 included tax forms (W-2s and CP-575s) and bank statements. Many of these document alterations are invisible to the human eye, but risk and operations teams can easily detect them with the help of Inscribe’s AI and ML models trained on millions of data points.
About half of fraud cases in 2022 were classified as identity fraud. One of the tactics used by these bad actors involves synthetic identity fraud – a type of identity theft in which a criminal combines both real and fake personal information to create a new, fictitious identity that can then be used for various identity-related schemes, such as credit card fraud, bank fraud, social services fraud and more.
While synthetic ID fraud is hardly new, it is only expected to grow given how lucrative it has become. Over the last two years, fraudsters have stolen an estimated $163 billion in unemployment relief offered in response to Covid-19 alone by leveraging identity fraud techniques, including synthetic identity fraud.
Want to learn more about synthetic ID fraud? Read our related post here.
Another type of fraud that gained traction in 2022 and is likely to continue into 2023 involves student loans.
As the payments pause instituted by the Biden administration during the pandemic expired in May 2022, fraudsters were ready to swoop in, masquerading as service providers that could help loan recipients have their debt forgiven or secure special repayment plans. Student loan fraud further increased later in the year when the federal government announced a new loan forgiveness program, which prompted a fresh round of outreach to unsuspecting victims.
Though the government and law enforcement agencies warned of such scams, many people fell victim to these ploys, inadvertently handing over cash or personal information and account details – information that was then used to fuel future scams, including identify fraud and identity theft.
As the current economic environment wreaks havoc on many household budgets, student loan scams are expected to increase in the coming year.
As online shopping becomes more commonplace, so too does eCommerce fraud. Loosely defined as any type of activity that uses deception to obtain money or goods from a digital retailer, eCommerce fraud has grown consistently in recent years as the pandemic accelerated online shopping trends and the toolset available to fraudsters rapidly matured.
These scams can take many forms – from digital thieves using stolen credit card numbers to make fraudulent purchases to sophisticated cybercriminals creating elaborate ad campaigns to drive real customers to shop on fictitious shopping sites. It can also include relatively low-level activity like return fraud, delivery address spoofing or checkout fraud, which often escape a full investigation, but still drain valuable resources from the business, driving up costs for legitimate customers.
The rise in business email compromise (BEC) – cyber scams that leverage sophisticated social engineering, phishing and other cyberattack techniques to target businesses and individuals – are also expected to rise in 2023.
In fact, in May 2022, the FBI released a public service announcement revealing a 65% spike in BEC scams between July 2019 and December 2021. This surge could be attributed in part to the rapid shift to remote work as companies grappled with restrictions related to the pandemic.
While BEC attacks can take many forms, some of the most common involve a fraudster posing as a vendor requesting payment for an invoice or person of authority gathering sensitive data or personal information from unsuspecting employees via email.
In 2021, cryptocurrency scammers stole an estimated $6.2 billion from victims around the world, representing an annual increase of about 80%. Most of these cases are investment scams, wherein victims are invited to take part in a business opportunity that promises a significant return. In reality, people unwittingly send their funds directly to a scammer.
Unfortunately, there are many reasons why financial crimes like crypto fraud are on the rise. With no traditional banks, financial institutions or government agencies involved in the transactions, there is very limited oversight for this activity. Once a transaction is made, it can’t be traced or reversed, meaning that there is limited recourse once the scam is discovered. Law enforcement groups rarely have the resources to investigate complex fraud that involves advanced technology or multinational crime rings. And many people’s lack of knowledge about cryptocurrency and the investment world make them prime targets for sophisticated cybercriminals.
As cryptocurrency becomes more mainstream and more people invest in the market, it is likely that these scams will continue to proliferate, taking advantage of a murky landscape, lax oversight and limited awareness.
Another type of fraud that is on the rise in recent years is the romance scam. Data published by the Federal Trade Commission in 2022 indicates that over the past five years, people lost $1.3 billion in romance scams – more than any other fraud category.
In these scams, fraudsters use dating apps, websites or social media, to connect with people who are lonely and in search of companionship. Once they establish a personal connection (often by mirroring the victim’s interests, values, and opinions) they ask the person for money, either to help with a financial crisis or medical emergency. Another common storyline involves the scammer needing help from the victim to access inheritance money or other funds that they cannot manage due to their location or circumstances. As part of this ploy, the victim will often be tricked into paying a fee to accept or move the money.
As the internet continues to play an increasing role in people’s social lives, it is likely that romance scams will grow, especially among those who are isolated and unfamiliar with secure online banking practices.
While many of these scams require people to be vigilant and protect themselves from becoming a victim, banks and other financial institutions play an important role in both fraud detection and fraud prevention. In today’s digital world, it’s essential for these organizations to leverage technology to strengthen security defenses, automate routine tasks and better serve their customers.
In fact, fraud within the financial services industry is also on the rise with financial service providers experiencing a nearly 10% increase in fraudulent transactions in 2022 and just over half (51%) of these incidents involving some element of identity fraud.
With that in mind, here are some new technologies, tools and solutions that are helping the financial services industry mitigate risk and cut down on current fraud trends:
Advances in digital technology have greatly enhanced fraud detection capabilities for banks and financial institutions. Modern solutions, which leverage algorithms as the foundation for predictive analytics and machine learning models, can review millions of transactions, events and other data points in real-time to identify patterns that can indicate fraudulent or criminal activity. Since most machine learning models are capable of “learning” over time, the tools become more accurate and precise in their detection capabilities.
In this landscape, it is essential for organizations to embrace digital tools to anchor their fraud detection practice and improve security for their customers. This is especially helpful when it comes to spotting early signs of fraud within customers’ bank accounts.
For more information on how AI is reshaping risk management for banks, please read our companion post: AI risk management banking.
Intelligent document processing (IDP) is a form of intelligent document automation that leverages advanced technology to extract semi-structured or unstructured data from documents, emails, PDFs, images and other files and convert it into structured, usable data.
Intelligent document processing enables enterprises to eliminate manual data processing tasks, which greatly improves processing times, reduces costs and eliminates errors.
For more information about how IDP helps organizations capture, analyze and harness the power of their data in a faster, more cost-effective and seamless way, read our companion post on intelligent document processing.
For many banks, lenders, credit unions and other financial institutions, their ability to spot fraud is significantly limited if they rely on their staff to review documents like pay stubs, account statements or employment contracts that are part of their underwriting or account opening decision-making process.
Fraudulent or manipulated documents are often invisible to the human eye and impossible to detect. However, machines can perform checks with superhuman accuracy and speed, improving decision making while reducing the time it takes to review each document.
Banks, financial institutions, lenders and any other organization that reviews documents as part of their customer onboarding or management process should consider leveraging an automated tool to streamline document reviews and improve accuracy.
While risk is a critical part of the fintech business model, these organizations are experts in lending – not risk. That’s why it’s so important for fintechs to engage partners who specialize in fraud and risk detection and can provide the tools and technologies to take this capability to the next level.
At the same time, no single risk management solution on the market offers complete protection and it is very unlikely that such a product will exist in the future. As such, organizations must adopt multiple defenses and integrate them into a single platform to provide comprehensive coverage.
Relying on multiple solutions (assuming they are integrated and configured properly) also enables a multi-faceted data strategy that will enhance decision-making.
Consumers today expect a frictionless experience… but when it comes to banking and finance they also expect strong security. Banks and financial institutions can blend these two requirements in a concept known as “coordinated friction.”
For example, banks can introduce friction strategically so that the organization can vet potential cases of fraud without unnecessarily hampering the user experience for all customers. This can involve asking for more information when applicants don't pass the initial ID or a document checks, instead of making the process longer and more complex for all users.
For banks and financial institutions, preventing fraud isn’t just a matter of reducing losses – it’s about fueling business growth. For every case of fraud the organization is able to detect or prevent, they are then able to take on a new legitimate customer that they perhaps wouldn’t be able to serve otherwise.
To that end, risk teams need to think about how they work with product and engineering teams to design products, services, and features, as well as define underlying business processes to simultaneously solve business issues, enhance the customer experience, reduce risk, and enable growth.
For more information about how Inscribe can help organizations reduce risk with award-winning fraud detection and document automation, schedule a demo with an expert from our team.