This crime can affect businesses from every industry making it imperative to stay vigilant with transaction fraud detection.

According to the 2024 State of Fraud Benchmark Report, almost 60% of businesses in the fintech and credit union industry lost over $500,000 to fraudulent transactions. As technology continues to progress, so does the capability for fraud attempts to occur more frequently. Fortunately, there is new technology to detect and prevent more advanced attacks.

Read on to discover how you can keep your business alert for transaction fraud.

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What is transaction fraud?

Transaction fraud is the illegal activity of conducting unauthorized payments or transacting through financial systems. This is one of the risks businesses in any industry face and is especially prevalent in online transactions.

It can be a result of identity theft where individuals use stolen personal information and credit card details to do either of the following:

• Make purchases of goods and services for personal gain
• Money laundering to move illicit funds through financial systems
• Harvest data to sell on the dark web
• On the extreme, sabotage competitor's business reputation and operations

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Types of transaction fraud

Transaction fraud encompasses various fraudulent activities that occur during financial transactions. These activities are motivated by illegally obtaining monetary funds, goods, and services. Most fraud trends seen today are largely enabled by the digital landscape. Knowing them can help businesses and financial institutions take the proper measures to prevent these fraudulent transactions from happening.

Here are some of the most common types of transaction fraud:

Credit card fraud

Credit card fraud is perhaps one of the most widely known types of transaction fraud. This occurs with unauthorized use of a credit card for purchases and fund withdrawals. While physical fraud is now mitigated with technological advancements like PIN and chip use, card-not-present (CNP) fraud through online or phone transactions is still a challenge to businesses.

Online transaction fraud

Similar to CNP fraud, this type of fraud happens through internet-based transactions and is closely tied to credit card crimes. It can include unauthorized use of payment accounts like PayPal, or the use of stolen credit card details for purchases.

Identity theft

When it comes to stealing an individual's personal information for financial fraud, this can be referred to as identity theft. In some instances, criminals will open new accounts with the victim's name under their existing accounts. Sometimes, they can do other fraudulent transactions directly on websites as digital transactions have made it easier for fraudsters to obtain and misuse personal information for their gain.

Phishing scams

Fraudsters can deceive victims with phishing scams that aim to pool personal information from names, usernames, passwords, and credit card details through various means. They can pose as legitimate businesses through emails, text messages, or even phone calls. Phishing has also become more advanced with social engineering and psychological manipulation to trick individuals.

Account takeover

Often, a result of phishing, malware, or data breaches is an account takeover or account fraud. This involves unauthorized access to a user's account, which is most prevalent in online transactions, whether for shopping or banking. Aside from hacking, there's also a chance that these accounts can lock the victims out by changing the password and account details.

E-commerce fraud

As online shopping grows in popularity, so does the chance of e-commerce fraud. This fraudulent transaction can include instances where customers conduct these. Chargeback fraud for example is where a customer might make a purchase online and request a chargeback or refund after receiving their order. Additionally, friendly fraud can also occur when a consumer purchases an item and claims it was unauthorized.

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What are the effects of transaction fraud?

Transaction fraud can have a wide range of effects that can impact individuals, businesses, banks, and the economy as a whole.

These are some of the significant impacts that you might encounter after fraudulent transactions.

• Financial losses for victims which may not always be recoverable, as well as businesses
• Increased costs from fraud, including investigations, stronger security systems, and legal costs in case of litigations
• Operational disruption from regular business and services, affecting organizations and other customers not involved
• Damage to credit scores, especially if customers are a victim of identity theft
• Legal and regulatory consequences if it is found security in place was not adequate to prevent fraud

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6 Technologies that improve transaction fraud detection

These technologies not only help in identifying and preventing fraud but also play a significant role in reducing false positives, improving customer experience, and maintaining regulatory compliance. As fraudsters become more sophisticated, the continued evolution and integration of these technologies will be crucial in the fight against transaction fraud. They can prove especially useful when selecting a transaction monitoring tool.

1. Artificial intelligence and machine learning

Artificial intelligence (AI) and machine learning algorithms have the capacity to analyze transaction data in bulk, in real-time. This can better inform businesses on detected patterns that indicate fraudulent activities. Plus, these systems use historical fraud data, which helps them determine and anticipate unseen types of fraud.

2. Blockchain technology

Blockchain provides a decentralized and immutable ledger. In effect, this can make it harder for fraudulent transactions to go unnoticed. It is especially useful in verifying the authenticity of transactions trying to hide under the veil of anonymity and ensuring transparency.

3. Biometric verification

Biometrics like fingerprints, facial recognition, and voice recognition are a valuable step to security measures. These help prevent transaction fraud with verification that is harder to replicate or steal by fraudsters as compared to obtaining passwords.

4. Behavioral analytics

Behavioral analytics looks into tracking customer behaviors. This looks into their pattern of transactions, detecting what might be unusual. In the event that this happens from a user's regular behavior, it can then be flagged as a potentially fraudulent transaction.

5. Natural Language Processing

Natural Language Processing (NLP) can be used to analyze customer communication and detect potential fraud. This means it can process a customer's emails or chat conversations to see if there are signs of phishing or social engineering and ultimately prevent fraudulent transactions from occurring with warnings.

6. Deep learning

A subset of machine learning is deep learning. This uses neural networks with many layers or deep networks to analyze the data. It's effective in detecting the more complex fraud patterns that traditional fraud transaction monitors might miss.

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Best practices to detect transaction fraud

Detecting transaction fraud effectively requires a combination of technology, vigilance, and proactive strategies.

These are best practices that can be employed by individuals, businesses, and financial organizations.

KYC and KYB processes

Utilizing the Know Your Customer (KYC) and Know Your Business (KYB) processes is one of the most important things you can do for your operations. Having the right information equips you with a starting point to create profiles and risk categories to review when suspicious transactions occur.

Monitor across platforms

As technology continues to advance, the best step to take when it comes to preventing and detecting transaction fraud is to set up all necessary security measures across platforms. This means monitoring not just your website, but your apps, APIs, and other points of contact with your customers.

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Stay abreast of the latest transaction fraud trends

There are many ways to steal personal information and defraud businesses. Whether you want to invest in fraud prevention software that conducts regular research or prefer to keep track, having a good grasp of the latest trends will help you stay prepared for any attacks.

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Staying vigilant with new technology

In an increasingly digital financial landscape, staying vigilant for transaction fraud prevention is not just about staying in regulatory compliance. One of the biggest factors at stake is maintaining your business's integrity and customer trust.

Luckily there are many emerging technologies and best practices that can help detect what are legitimate transactions and prevent fraudulent or suspicious activities. By embracing these advanced solutions and investing in a good fraud management tool, you can enhance your fraud detection process.

Vespia, for example, employs a powerful combination AI transaction monitoring, adaptive learning, and rule-based monitoring to keep your business safe from fraudulent transactions. Sign up today and schedule a demo to see how you can make the most out of the tool.

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