What are the Different Types of Fraud?

Understanding the Different Types of Fraud to Protect Your Business

Fraud exists in every industry and is no different than any other crime, where there has to be motivation, rationalization, and opportunity. There’s no question that every business is susceptible to it, mainly because there are so many ways scammers can attack your company.

Since the pandemic, 1 out of 3 people conduct over half of their transactions online, and fraudsters have mirrored this trend and target industries that experience routine or trended spikes in usage. Digital fraud has been suspected to increase by over 50%, although many experts speculate that the number is exponentially higher.

In fact, in October, Forbes reported that Synthetic identity fraud is projected to cost businesses nearly $2.5 in 2022, and research suggests that number could double to nearly $5 billion by 2024.

Although these statistics can be alarming, you can take preventative measures to protect your company, and it’s imperative to understand the different types of fraud to reduce the chances of an attack and minimize losses effectively. This blog explores the different kinds of fraud and what lenders can do to minimize losses and effectively reduce the likelihood of fraudulent activity.

What is Synthetic Identity Fraud?

Synthetic identity fraud occurs when a fraudster combines real and fake personal information to commit mischievous activities. Lenders must utilize various tools and methods, plus data, to spot synthetic identity. Often the linchpin data point for financial services is a Social Security number. They may consider an email or IP address if they’re looking to spot synthetic fraud with a digital data point.

Example: A thief combines a stolen Social Security Number and a phony name, plus uses the individual’s date of birth and address to form a new identity.

What is First-Party Fraud? 

First-party fraud refers to an individual who applies for a loan/credit card with the intention of no payback or providing false financial info to receive a better rate. This type of fraud can cause issues for companies as it’s often mistaken for credit loss or written off as bad debt.

Common types of first-party fraud consist of:

Address Fronting is utilizing a different address for an application to reduce the cost of a service.

Chargeback fraud is when an individual disputes charges on their card to get a refund from their provider. Chargeback fraud is also commonly referred to as “friendly fraud.”

De-shopping is considered buying, using, and returning items for a full refund.

Fronting occurs when someone sets up a service with someone else’s name to save money.

Goods Lost in Transit Fraud is purchasing items online, like Amazon, and contacting the lender that either has not been delivered or is damaged to get a full refund.

What is Third-Party Fraud? 

Third-party fraud is known as identity theft and occurs when a fraudster uses another person’s identity to open new accounts without their knowledge. This type of fraud can easily be spotted in portfolios because it has an apparent victim.

The perpetrator acquires sufficient credentials about an actual consumer to pass themselves off as that person to gain money or advantage in that person’s name.

Example: Someone uses a person’s credit card number to purchase items without the cardholder knowing. This could include applying for financial instruments or other facilities using the victim’s credentials.


Other Types of Common Fraud

Counterfeit: This is where materials are falsified to be used or traded to obtain money or advantage. Think about that ultra-cheap, often poor quality, “designer goods” bought from a street merchant; or about the falsification of identity or payment documents to gain access to goods or services or to effect a purchase to which the perpetrator is not entitled.

Scam: This is a generic term for various deceptive schemes where the perpetrator seeks to gain trust from or money out of the victim through misrepresentations. Some typical scam scenarios include; health, vacation, investment, ticketing, romance, pension, courier/delivery, advance fee or money transfer, authority, discount goods, invoice or mandate, insurance, maintenance, charity, etc. The basic rule of thumb is that if it looks too good to be true or “feels wrong,” it probably is!

Account Takeover: This is where a perpetrator gains access to a consumer’s pre-existing personal (usually financial but could also be email, social media, or any account where misrepresentation may lead to misrepresentation or wrongful gain) facilities to impersonate the victim and gain an advantage by falsely using the account for their purposes. This could arise when a perpetrator has intercepted or acquired financial instruments or authentication tokens by nefarious means.

Social Engineering: These are instances where a perpetrator will manipulate and dupe a victim, often through a confidence trick, into performing actions or disclosing confidential information to facilitate a fraudulent or deceptive scheme. This could include clicking on links or downloading applications laden with malware, leading to data breaches, facilitating unauthorized entry into systems, or involving the movement of funds by deception. These attacks are most often facilitated through email (phishing), telephone (vishing), text messages (smishing), or social media networks (snishing).

Concealment is the intentional withholding of facts or a failure to reveal salient information that can give the perpetrator a direct or indirect unfair advantage or misleads another party to their detriment. This can include mortgage or property fraud, false accounting, tax fraud, etc.


Protecting Your Business Against Fraud

To keep pace in an increasingly competitive and digital world, lenders need immediate access to pertinent data when assessing a customer’s credit risk. Manual ID verification can’t keep pace with demand, and fraud and ID checks are integrated into Modellica’s underwriting workflow. GDS Link automates and accelerates key underwriting processes, all while mitigating fraud risk, improving time to fund, and nurturing positive customer experiences. Learn more about our solutions here or request a demo to get started.


Before you go…

Inside the Lending Link Episode, Protecting your Business Against Fraud and Synthetic Identities with Tom Algie from IDology, we break down the various frauds and define the differences between first-party, third-party, and synthetic fraud; listen here:

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