In recent years, there have been notable technological advancements in the financial sector, leading many businesses to adapt their structures to keep pace with these innovations. Across the board, most industries now rely on digital mobile apps for transactions, enhancing convenience for users. Thus, global digital payments are on the rise, driven by increased technology accessibility, especially in developing nations, and bolstered by behavioural shifts since the COVID-19 pandemic. Presently, the international financial market is valued at $25,839 billion and is forecast to hit $37,343 billion by 2026.
However, the considerable sums of money at stake, combined with the lack of solid identity verification mechanisms, have given criminals the leeway to exploit weaknesses, resulting in significant financial harm to users. Even though the financial world has taken measures against swindlers, dishonest schemes remain widespread, allowing for numerous criminal activities. Notably, digital fraud attempts targeting financial entities surged by 150% in 2021, exposing both businesses and individuals to heightened risks of financial offences like money laundering, terrorist funding and identity theft.
As face-to-face interactions have dwindled, 75% of new users have turned to mobile apps and websites for financial transactions, signaling a lasting preference for remote solutions over traditional visits to offices. However, even as the effects of the pandemic have diminished, the move to online services persists. This surge in online behaviour has heightened exposure to sophisticated fraud schemes, like social engineering and account takeovers, revealing systemic vulnerabilities which many nations are struggling to combat. Economists forecast that the forthcoming years might witness a significant decline in cash use, underscoring the digital transformation’s momentum and the subsequent rise in e-commerce and digital services.
The emergence of cryptocurrency is further revolutionising the financial sector by offering users the chance to transact via a decentralised platform. In 2021 alone, the total crypto market reached £1.5 trillion, with forecasts suggesting a CAGR of 7.1% in the forthcoming years. While 2022 and early 2023 haven’t been particularly fruitful for crypto investors, specialists anticipate a return to form soon. Given the data, it’s not too far-fetched to suggest that the global digital financial arena is potentially poised to eclipse the entire economic framework. But, with this rise in the use of cryptocurrencies, fraud has also strengthened its hand, confounding those who had pronounced a freedom from fraud with the advent of digital currencies.
General issues of concern
A recent report by SAS into the views of 120 independent interviews of payment and security executives in 20 countries provides a clear picture of how digital fraud has changed the operating environment globally. Financial institutions clearly face significant risks, in reputation and from financial losses. These issues touch all nations and can affect businesses of all size, along with individuals. They happen rapidly and, so often, legislation and detection are slow to respond. Some of the general issues of risk brought out in the report can be highlighted as follows:
- Over the last two years, digital fraud techniques have become increasingly advanced, with a marked surge due to the shifts in consumer behaviours caused by the pandemic and its impact on financial services and commerce.
- Despite vast geographical differences—spanning the Americas, Europe, Middle East, Africa and the Asia Pacific region—there are striking similarities in the fraud patterns observed in digital payments worldwide. However, the rapid evolution of payment technology has meant that detection and prevention methods in some locations are still rudimentary. Newly introduced payment experiences often lack comprehensive fraud prevention strategies at their inception, primarily because of an insufficient grasp of how malefactors might manipulate the technology.
- Identified patterns span various digital payment methods, such as digital wallets, peer-to-peer transfers, merchant QR code transactions and remittances. Criminals capitalise on these immediate and real-time payment networks to swiftly misappropriate and launder money, which complicates the retrieval process and often leaves the financial burden on the consumers.
- The tactics employed by these criminals, although diverse, remain consistent across countries and regions. This suggests a coordinated and systematic use of technology to target the financial services sector. Tactics like social engineering, technological exploitation and data breaches equip criminals to execute attacks specifically crafted to circumvent existing fraud prevention measures.
- Patterns observed in the market regarding identity fraud attacks are echoed in all nations that are adopting digital payments. At present, the U.S. fraud loss rate for point-of-sale stands at 1.2% of all transactions, whilst it is 3.1% for card-not-present transactions. Given the decrease in face-to-face transactions due to the pandemic’s economic impact, and the surge in online transactions, this narrowing gap in fraud loss rates is set to persist.
- Merchants are witnessing a rise in a blended fraud technique where customers purchase online and collect in-store. This method, facilitated by the ease of using pilfered payment details online and employing a mule network for collection, alters the nature of face-to-face fraud. Current online identity checks and transaction oversight fail to detect this approach effectively.
- Globally, criminals employ social engineering, manipulating individuals into inadvertently partaking in fraud. They exploit various channels for phishing, including emails, text messages (SMS), voice calls and deceptive apps, to gather essential data for account usurpation and scams. The rapidity of instant payments makes them the most expedient means for criminals to capitalise on fraudulent schemes.
- The notion of cross-border fraud is evolving. Beyond merely handling currency exchanges, financial institutions now grapple with international threats stemming from digital fraud avenues. Executives have pinpointed international fraud syndicates as culprits, necessitating heightened collaboration to thwart these digital deceptions.
- A primary technological hurdle that executives highlighted is the vast data pool associated with digital payments and the intricate necessity of multiple tools for swift analysis and decision-making. Numerous financial entities still lean heavily on consumer awareness initiatives, information from transaction messages for approvals, and post-approval transaction scrutiny.
Three particular areas of fraud
In addition to these general risk issues, three particular aspects of financial fraud are highlighted repeatedly in a wide range of sources within the finance industry. They are worthy of particular mention.
Money laundering is a pressing global concern, exacerbating terrorism and draining 3% to 5% of the world’s GDP, equating to over $2 trillion. Most jurisdictions have criminalised it, introducing laws to combat financial crime. In 2020, banks faced fines exceeding $10 billion for not adhering to Anti-Money Laundering (AML) standards. By the conclusion of 2023, it is estimated that implementing AML measures will cost around $1.77 billion.
Identity theft has also significantly alarmed global authorities. Fraudsters, using sophisticated methods, are increasingly compromising user identities. The US experienced a 22% rise in identity theft incidents in 2021, costing victims $56 billion. Stolen identities are then exploited for scams, such as opening fake bank accounts, credit card fraud, and money laundering. Astonishingly, 2021 saw a 109% surge in global financial sector identity frauds compared to its preceding year.
Credit card fraud remains a dominant scam in financial institutions. Criminals illicitly access user details to perform transactions. In 2021, losses amounted to $32 billion, with projections suggesting a climb to $38 billion by 2027.
Financial crime has evolved in its complexity and magnitude, with significant repercussions for the global economy. The surging trends in financial fraud underscore an urgent need for enhanced regulatory measures and innovative technological interventions. As these crimes continue to shape the financial landscape, understanding their patterns and devising strategic countermeasures becomes paramount for securing global financial integrity.
