Fraud Prevention: What is it and How Can You Protect Your Business?

With 70% of North American financial institutions reporting an increase in fraud over the past year, businesses must remain vigilant to avoid financial losses and reputational damage.^[1]OrboGraph. “FeatureSpace Report: Check Fraud Increased 70% in 2023.” Accessed October 25, 2024 Fraud impacts all industries, from large banks to small retail stores. And with modern scammers growing increasingly effective, it’s more critical than ever for businesses to remain aware of the latest fraud risks and fraud prevention strategies.

However, there’s no need for a business to make itself an easy target for fraud. With a robust fraud detection strategy, modern fraud prevention software, and other tools, it’s now easier to combat scammers. This guide explores fraud prevention, why it’s important for businesses, how it works, and other related topics. Read ahead if you want to reduce your business’s exposure to fraud!

What is Fraud Prevention?

Fraud prevention is a proactive strategy and set of measures implemented by businesses or organizations to detect, deter, and mitigate fraudulent activities. It involves using various technologies and processes to safeguard against deceptive practices, unauthorized access, and financial losses. Its goal is to ensure the integrity and security of transactions, information, and assets.

Fraud prevention is one component of a business’s overall risk mitigation strategy. Fraud prevention strategies vary depending on the business type, industry, and various other factors, such as whether the business sells products online or in person.

Fraud detection is one component of fraud prevention. Fraud detection is the process of identifying and uncovering instances of fraudulent activities. It involves using data analysis, pattern recognition, and other techniques to spot unusual or suspicious transactions that may indicate fraudulent actions.

While fraud detection is critical to fraud prevention, a business’s overall fraud prevention strategy will also include processes for deterring and mitigating fraud. It’s not enough to simply detect fraud. Your business must also have strategies for stopping it.

Why is Fraud Prevention Important for Businesses?

Firstly, fraud prevention is essential for businesses as it reduces exposure to financial losses. When a scammer uses stolen credit card details, takes over a customer account, or convinces an employee to send a bank transfer to the incorrect bank account, it costs businesses money. Likewise, if a fraudster manages to access sensitive information on customers or staff, it can result in lawsuits and other costly penalties. The United States is the nation with the highest average cost per data breach, with businesses and organizations paying an average of $9.48 million per breach.^[2]Varonis. “84 Must-Know Data Breach Statistics [2023].” Accessed October 25, 2024

Secondly, if your business fails to protect customer payment information and personal details, it will suffer reputational damage. Modern consumers trust businesses with a significant amount of information when they sign up for accounts. Not protecting this data is a breach of trust. So, while the near-term financial losses experienced when a fraudster scams your business are painful, you may also face long-term losses if your business develops a negative reputation with customers.

Lastly, if a business doesn’t make efforts to prevent fraud, it may face an increased number of chargebacks. As a business’s chargeback ratio increases, merchant service providers may choose to increase payment processing fees to mitigate risk. If a chargeback ratio becomes excessive, the business may lose access to credit card processing altogether. Card networks have a responsibility to protect cardholders from scams, and if they believe a business is high-risk, they reserve the right to restrict payments.

How Does Fraud Prevention Work?

Fraud prevention varies depending on the type of fraud and the business’s fraud strategy. For the purpose of this guide, we’ll explore how fraud prevention works in terms of payments. Modern fraud prevention processes may resemble the following steps:

1. Set Up Secure Payment Systems: First, a business must partner with an experienced merchant service provider (MSP) to set up secure payment systems. An MSP with a focus on security will ensure a business has encrypted payment gateways, fraud detection tools, and other necessary resources.
2. Employ Strong User Authentication Tools: Next, a business will employ strong user authentication tools to protect payments, accounts, and other sensitive areas. For example, two-factor authentication (2FA) is a good resource for ensuring scammers can’t log into a customer account with just an email and password.
3. Monitor Customer Transactions: After a security-focused payment infrastructure is in place, it’s critical to monitor customer transactions. A business must highlight suspicious payments, such as a series of significant transactions within a short period.
4. Train Employees: A business with a robust fraud prevention process ensures all its staff are fully trained on fraud prevention software and protocols.
5. Audit and Track Fraud Prevention Performance: After setting up secure payment systems, employing strong authentication tools, and training staff, it’s essential to keep tabs on how a fraud prevention system is performing. Businesses must continue to audit and track fraud issues to ensure there aren’t any weaknesses for fraudsters to exploit.

How to Prevent Fraud: Prevention Tips & Methods

Understanding some essential tips and tricks can help your business avoid scammers. Let’s explore our top suggestions for fraud prevention:

While modern technology has made it simpler for fraudsters to harm businesses, it has also made it easier for businesses to catch repeat fraudsters. Using machine learning and data can help your business spot scammers before they harm your business. Many online fraud prevention software platforms maintain large databases of scammer details, such as IP addresses, email addresses, and more. The software can leverage this data to spot scammers before they complete orders on your website.

Anomaly detection software spots unusual customer behavior. For example, if a long-time customer suddenly makes a series of unusual purchases using an overseas IP address. This is a valuable tool in combatting fraud for eCommerce businesses (especially account takeover fraud).

Know Your Customer (KYC) protocols involve verifying key personal details about a customer before they open an account or make a purchase. This is a common anti-money laundering approach required by some regulators. However, it also has anti-fraud benefits. Employing KYC protocols from the outset ensures only genuine customers can set up accounts with your business. While this process can be expensive, it greatly reduces fraud exposure.

While traditional username and password authentication is essential, businesses must also use further controls. For example, two-factor authentication is a process that requires users to provide two different authentication factors to verify their identity. Typically, this involves combining a username and password with a temporary code sent to their phone or email. It significantly increases account security.

If you allow customers to create accounts and store payment information, it’s critical to continuously monitor their accounts. If suspicious patterns arise, it could be a sign of fraud. For example, if a customer who usually buys a few small products every month makes a series of large purchases in quick succession, something may be wrong.

This is very similar to the “Know Your Customer” tip in this guide. Identity verification is essential if you want your business to avoid scammers that are impersonating others. Whether it’s full-scale identity fraud or account takeover fraud, identity verification provides an extra backstop to prevent losses.

Modern Fraud Prevention Techniques: Using Artificial Intelligence (AI) and Machine Learning (ML)

Artificial Intelligence (AI) and Machine Learning (ML) play major roles in enhancing business payment fraud prevention. They analyze vast datasets in real time, learning normal transaction patterns and identifying anomalies indicative of potential fraud. AI-powered systems continuously evolve, adapting to emerging fraud tactics, making them more effective than static approaches. Machine learning algorithms can detect subtle patterns and anomalies, even in large datasets.

Moreover, AI enables the creation of predictive models that assess the probability of a transaction being fraudulent, enabling proactive intervention. These systems can analyze diverse data sources, including user behavior, geolocation, and more, providing a holistic view of transaction authenticity. Likewise, by automating the detection process, AI and ML reduce false positives, enhancing the efficiency of fraud prevention efforts.

Common Types of Fraud & Fraud Attacks

Unfortunately, there’s no shortage of types of fraud impacting modern businesses and organizations. Let’s explore the common types of fraud and fraud attacks impacting the United States economy:

Accounting fraud occurs when individuals manipulate financial records to deceive stakeholders about a company’s financial health. This deceptive practice may involve inflating revenues, understating expenses, or falsifying financial records. The aim is to present a misleading picture of the company’s performance. Accounting fraud can have severe consequences, including legal actions, financial losses for investors, and damage to the company’s reputation. Regulatory bodies enforce standards and conduct audits to prevent and detect accounting fraud.

While some types of accounting fraud involve deceiving stakeholders outside the business to attract more investment or increase the value of the company, accounting fraud may also involve stealing money from the business. For example, an accountant at a company may embezzle from the business to their personal bank account using false invoices or other deceptive practices. Entrepreneurs must have firm controls in place to prevent internal fraudsters from stealing company money.

Bank fraud is the intentional use of deceitful practices, such as false information or forged documents, to obtain financial gain or assets from a financial institution. There are slight differences between bank fraud and accounting fraud. While bank fraud targets financial institutions directly, accounting fraud focuses on misrepresenting a company’s financial health. Let’s explore some examples of bank fraud:

• Check Fraud: Forging or altering checks for financial gain is bank fraud, as it involves deceiving a bank.
• Loan Fraud: Providing false or misleading documents to a bank in order to gain approval for a loan is bank fraud.
• Bank Account Takeover Fraud: Gaining access to someone else’s bank account and transferring funds for financial gain is bank fraud.

Credit card fraud is a major issue impacting businesses and cardholders throughout the United States. There are more than 440,000 reported cases of credit card fraud in the United States annually.^[3]The Motley Fool. “Identity Theft and Credit Card Fraud Statistics for 2023.” Accessed October 25, 2024 This type of fraud involves using credit cards illegally for financial gain. Let’s explore the two primary examples of credit card fraud:

• Unauthorized Transaction Fraud: With unauthorized transaction fraud, a scammer uses a victim’s stolen credit card or credit card details to purchase goods and services. When a cardholder realizes their details have been stolen, they will file a chargeback, resulting in the merchant needing to refund the cardholder for the losses.
• Chargeback Fraud: With chargeback fraud, a cardholder uses their credit card to purchase goods or services and files a dishonest chargeback to recover the money. As it can be hard for a business to prove a cardholder used the card (especially for online purchases), this type of fraud is challenging to combat.

Fortunately, there are modern fraud prevention services designed to help combat both types of credit card fraud.

If scammers gain access to sensitive personal information, such as social security numbers (SSNs) and email accounts, they may be able to “steal” someone’s identity. Identity theft involves using someone else’s identity to open credit accounts. In doing so, a scammer can gain access to credit cards, car loans, mortgages, leases, and a range of other financial products. Identity theft can be particularly challenging as fraudsters may obtain photo ID with their victim’s name, making it hard to stop them from continuing to use the stolen identity. There are now many identity theft monitoring software products available to help consumers stop fraudsters before they take complete control of a victim’s identity.

Insurance fraud involves deceitful actions with the intention of gaining an illegitimate financial advantage from insurance policies. This can include exaggerating damages, falsifying claims, staging accidents, or providing false information. Perpetrators seek to receive insurance payouts to which they are not entitled, leading to increased costs for insurance providers and potentially higher premiums for honest policyholders. Insurance companies use considerable resources to detect fraudsters. In an effort to deter fraud, many firms seek significant penalties if they identify an insurance scam.

Investment fraud is a deceptive practice where individuals or entities manipulate information to lure investors into making financial decisions that will benefit the fraudsters. Let’s explore two well-known forms of investment fraud:

• Pump-and-Dump Scams: A pump-and-dump scam artificially inflates the price of an asset so fraudsters can withdraw their funds profitably. With a pump-and-dump scam, fraudsters may use false information to create hype around an investment. Once the investment value increases, the fraudsters withdraw their money and allow the investment to fall.
• Ponzi Schemes: A Ponzi scheme involves paying old investors with the money of new investors to create the appearance that an investment product has strong returns (when, in truth, little or no investing is going on behind the scenes). Eventually, when new investors dry up, or too many investors want to withdraw money at the same time, the scheme collapses.

Malware, short for malicious software, is software specifically designed to harm or exploit computer systems. It poses a significant risk to businesses as it can infiltrate networks, steal sensitive data, disrupt operations, or provide unauthorized access. Malware includes various forms like viruses, ransomware, and spyware. Its evolving nature requires businesses to employ robust cybersecurity measures to prevent infections that could lead to financial losses, reputational damage, or data breaches. It’s no wonder the cyber insurance industry is predicted to reach a valuation of $84.62 billion by 2030!^[4]Fortune Business Insights. “Cyber Insurance Market Size, Share & COVID-19 Impact Analysis, By Insurance Type (Standalone and Tailored), By Coverage Type (First-party and Liability Coverage), By Enterprise Size (SMEs and Large Enterprise), By End-user (Healthcare, Retail, BFSI, IT & Telecom, Manufacturing, and Others), and Regional Forecast, 2023-2030.” Accessed October 25, 2024

Telemarketing fraud is a deceptive practice where individuals or entities use telephone calls to unlawfully solicit money or personal information from unsuspecting individuals. Perpetrators often employ false claims, high-pressure tactics, or misrepresentations to manipulate victims into making financial transactions or divulging sensitive information, resulting in financial losses or identity theft. With developments in AI, telemarketing fraud may become a major issue. Criminals may be able to impersonate family members or authority figures (such as someone’s boss) to steal personal details, credit card information, and more.

Phishing fraud involves deceptive attempts to obtain sensitive information, such as usernames, passwords, and financial details, by posing as a trustworthy entity in electronic communications. Typically, fraudsters use fake emails, messages, or websites that mimic legitimate ones to trick individuals into revealing confidential information, which is then exploited for unauthorized access, identity theft, or financial scams.

This is a significant threat for many modern businesses. Phishing fraudsters may send malware links via email to staff members, hoping the staff member will click the link and provide access to the business’s systems.

Ransomware is a type of malicious software that encrypts a user’s files or locks them out of their system. The fraudsters then demand a ransom payment, usually in the form of cryptocurrency. It is a form of cyber extortion, and upon payment, there is no guarantee that the attacker will provide the necessary tools to recover the data. This is becoming a major issue for many businesses. Evidence suggests crypto-related ransomware attack payments reached $1 billion in 2023.^[5]Reuters. “Crypto ransom attack payments hit record $1 billion in 2023 – Chainalysis.” Accessed October 25, 2024

So, how is this different from malware? Ransomware is a type of malware. The term malware encompasses various types of computer viruses, including ransomware, adware, spyware, and more.

Account takeover (ATO) fraud involves a scammer gaining access to a customer account. If a fraudster is able to take over a customer account on a business’s website, they can use the customer’s saved payment details to purchase products and services. In many cases, scammers take over accounts by using leaked passwords, social engineering, hacking, and other techniques. Not only does this pose a financial risk to businesses, but it can also result in reputational damage. If you can’t keep customer details secure, your business will be negatively affected.

How Your Customers Can Reduce Their Risk to Help Prevent Fraud

While it’s a business’s responsibility to safeguard itself and its customers against fraud, there are steps customers can take to reduce fraud exposure. By encouraging your customers to protect themselves from scammers, your business can make it easier to combat fraud. Let’s explore some ways your customers can shield themselves from fraudsters:

Data breaches are now commonplace within the United States, and with many businesses requiring customers to set up accounts to purchase products online, there are various opportunities for scammers to steal login credentials. Customers can reduce exposure to data leaks by using different passwords across their accounts. If a customer uses the same password for all their online accounts, one leak may result in scammers being able to access multiple accounts.

Two-factor authentication (2FA) can play a major role in protecting customers from scammers. With 2FA, after an account holder enters the correct password, they must also receive a confirmation code to their phone or email address. This ensures scammers can’t hack into accounts with a stolen password. Encourage customers to use two-factor authentication for their email accounts, online store accounts, and other eligible platforms. It’s an excellent additional layer of security.

Many card issuers now offer mobile alerts for credit card payments, making it easier for cardholders to spot fraud before it escalates. By receiving a push notification on their phones whenever a credit card transaction is processed, customers can spot suspicious transactions immediately and contact their issuing bank to report potential fraud.

There are now various services offering identity theft monitoring to consumers. Identity theft monitoring tracks credit applications, new credit accounts, and other credit activities to determine if someone else is using your identity to open accounts or seek loans. Many of these services also track data on the dark web to determine if any of your passwords have been leaked in data breaches. This is a must-have service for modern consumers.

Fraud Prevention: Closing Remarks

Evidence suggests businesses lose 5% of their revenue to fraud each year.^[6]Association of Certified Fraud Examiners. “Organizations Worldwide Lose Trillions of Dollars to Occupational Fraud.”Accessed October 25, 2024 Combatting fraud is a major challenge for merchants in all industries. Using the fraud prevention tips outlined in this guide will help your business reduce its exposure to scammers.

However, the first step any modern business should take to reduce fraud exposure is to partner with a reputable merchant service provider. By partnering with a provider with a focus on security and payment fraud prevention services, your business will be one step ahead of fraudsters. Always check your merchant account provider has encrypted payment gateways, chargeback protection, 2FA, and other security tools!

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