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The Modern Fraud Prevention Playbook: 

8 Ways to Avoid Risk & Accelerate Growth

By Alex Faivusovich

Modern Fraud Playbook

Introduction to Modern Fraud Prevention

Whether you’re:

  • A seed-round start-up in a hyper-growth market 
  • A veteran company in your field
  • A neobank looking to revolutionize the space 
  • A traditional credit union looking to revamp, or 
  • A crypto exchange exploring new revenue vectors 

Expanding to new products, offers, and features is a critical part of your growth strategy. 

Typically, new offerings unlock access to more revenue, enhance the customer experience, and bring new opportunities for your business. But, they also hold a fair amount of fraud risk within them.

This Modern Fraud Prevention Playbook will help you understand the rewards and risks associated with several product expansion scenarios to help you create a balanced pre-launch approach.

Let’s get started. 

Scenario: Payment Cards (Visa, MC & AMEX) 

Scenario: Payment Cards (Visa, Master Card, American Express)

Payment cards can be separated into two categories: Debit and credit cards. Debit and credit cards are two of the most commonly used payment cards in the world. They both have similar characteristics, such as magnetic stripes, card digits, EMV chips, and CVV codes.

Although they work in similar fashions, the two have inherent differences. A debit card uses funds from your bank account (meaning the transaction will be approved only if there are sufficient funds in the account), while a credit card is linked to a credit line that was underwritten and approved during the application process based on the customer’s creditworthiness. Purchases made with credit will allow customers more time to pay them back.

Visa, Mastercard, American Express, and Discover are major credit card companies in the United States.

Reward:

Risk:

  • Payment card rails are very popular worldwide and many consumers hold a different variety of payment cards in their wallets. 
  • Payment cards no longer represent “physical only” forms as they can be linked to mobile wallets and have digital-only options.
  • Issuing debit cards opens an opportunity to gain revenue from the interchange fees from the network while allowing your customer fast access to their funds via a payment form that is accepted by merchants and can resolve most of the consumer's day-to-day payment needs.
  • If you’re operating in the crypto space, this could be a great feature to offer off-ramp spend of fiats. 
  • With the introduction of EMV Chips on cards and the high adoption of POS terminals among retailers, supporting chip transactions and risk exposure around card cloning and counterfeit copies of cards have significantly dropped.
  • With that in mind, CNP (Card Not Present) Fraud has been on the rise ever since. 

Reward:

  • Payment card rails are very popular worldwide and many consumers hold a different variety of payment cards in their wallets. 
  • Payment cards no longer represent “physical only” forms as they can be linked to mobile wallets and have digital-only options.
  • Issuing debit cards opens an opportunity to gain revenue from the interchange fees from the network while allowing your customer fast access to their funds via a payment form that is accepted by merchants and can resolve most of the consumer's day-to-day payment needs.
  • If you’re operating in the crypto space, this could be a great feature to offer off-ramp spend of fiats. 

Risk:

  • With the introduction of EMV Chips on cards and the high adoption of POS terminals among retailers, supporting chip transactions and risk exposure around card cloning and counterfeit copies of cards have significantly dropped.
  • With that in mind, CNP (Card Not Present) Fraud has been on the rise ever since. 

Play:

Transaction monitoring based on historical customer profiling is the key to success when it comes to managing payment card risk. 

To prevent Card Not Present Fraud, organizations must take the following actions:

  • Build a strategy based on risk levels and having unique associated rules to monitor your high/medium/low-risk levels.
  • Separate monitoring into Card present/EMV/CNP rules to have granular control of different fraud scenarios. 
  • Build a strategy based on risk levels and having unique associated rules to monitor your high/medium/low-risk levels.
  • Create a separate strategy for domestic and international monitoring. 
PRO TIP:

Understand the historical behavior of the user and deploy a monitoring strategy that looks for deviation.

Additional Resources:

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Scenario: P2P (Peer-to-Peer)

Scenario: Peer-2-Peer

Peer-to-peer payment platforms and rails facilitate payments between parties through online transfers. 

Reward:

Risk:

  • With many different P2P players in the market, (Zelle, Paypal, Venmo & Cashapp) users can link their bank account or credit/debit card to the P2P wallets (apps).
  • This link unlocks instant payment capabilities with their peers as well as pushes payments to their cards/accounts. This makes sending and receiving payments from others fast and convenient.  
  • Internal P2P (where users are allowed to pay each other as long as they are on the same app/platform) is a great opportunity for the acquisition of several users from the same household, for example, parents who wish to pay their children's allowance or roommate who split the monthly rent. 
  • While P2P is a very convenient way to send and receive payments between peers, allowing P2P on your platform might expose your users to both scams and fraud.
  • P2P fraud happens when someone accesses or uses your user's account without your permission (Account takeover) and attempts to execute a P2P outbound payment. 
  • P2P scams happen when your users are tricked into sending a payment to a bad actor. 
  • Another potential risk to consider is money mules. Money mules are bad actors who utilize your platform to move funds from point A to Point B, essentially they don’t care much about your product offering and just seek to maximize the funds' movement capabilities provided by your platform, and while on paper money mules might look like “profitable” users it is crucial to remember they’re usually a part of a much longer chain of money laundering.

Reward:

  • With many different P2P players in the market, (Zelle, Paypal, Venmo & Cashapp) users can link their bank account or credit/debit card to the P2P wallets (apps).
  • This link unlocks instant payment capabilities with their peers as well as pushes payments to their cards/accounts. This makes sending and receiving payments from others fast and convenient.  
  • Internal P2P (where users are allowed to pay each other as long as they are on the same app/platform) is a great opportunity for the acquisition of several users from the same household, for example, parents who wish to pay their children's allowance or roommate who split the monthly rent. 

Risk:

  • While P2P is a very convenient way to send and receive payments between peers, allowing P2P on your platform might expose your users to both scams and fraud.
  • P2P fraud happens when someone accesses or uses your user's account without your permission (Account takeover) and attempts to execute a P2P outbound payment. 
  • P2P scams happen when your users are tricked into sending a payment to a bad actor. 
  • Another potential risk to consider is money mules. Money mules are bad actors who utilize your platform to move funds from point A to Point B, essentially they don’t care much about your product offering and just seek to maximize the funds' movement capabilities provided by your platform, and while on paper money mules might look like “profitable” users it is crucial to remember they’re usually a part of a much longer chain of money laundering.

Play:

Keeping in mind refunds are nonexistent and with no middleman involved, any outbound P2P transaction should be considered lost in case of a dispute. 

To combat P2P scams and fraud, implement the following strategy:

  • Monitor both inbound and outbound activity.
  • Label any account that might not fit the business purpose of the feature. 
  • Learn about the correlation between users leveraging network analysis capabilities. 

Taking these steps is essential to flagging potential bad players. 

PRO TIP:

Define what type of activity does not make sense from a product utilization perspective, utilize visualization capabilities of network analysis to understand better how users interact with each other.  

Additional Resources:

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Scenario: Real-Time Payments (RTP & FedNow)

Scenario: Real-Time Payments

Unlike the peer-to-peer payment (P2P) platforms, Real-Time Payments are a new, faster payment rail that enables financial institutions in the U.S. to clear and settle payments in real-time. The Clearing House RTP Network was launched in November 2017, and the FedNow Network is scheduled to launch in 2023.  

Reward:

Risk:

  • The core concept of Real-Time Payments (RTPs) is the Originating FI sends a message to the network that includes the payment details, and upon checking the account information, the Clearing House processes the message and routes the payment to the destination FI. 
  • If your partner bank and BaaS provider support RTPs, introducing them to your platform can potentially bring in users who are looking for those capabilities, especially in the SMB segment. 
  • With the Faster Payments initiative increasing financial transaction clearing times, the potential for fraud risks will naturally rise. Simply put, faster payments = faster fraud.
  • The potential for criminals to exploit this new innovation is expected to increase as consumer adoption increases.
  • Bad actors might attempt to take over your user's account and attempt to execute an outbound RTP push payment. 
  • Inbound RTP risk is something to consider as well, as bad actors might try to establish accounts on your platform and act as payees of illicit RTP transactions. 

Reward:

  • The core concept of Real-Time Payments (RTPs) is the Originating FI sends a message to the network that includes the payment details, and upon checking the account information, the Clearing House processes the message and routes the payment to the destination FI. 
  • If your partner bank and BaaS provider support RTPs, introducing them to your platform can potentially bring in users who are looking for those capabilities, especially in the SMB segment. 

Risk:

  • With the Faster Payments initiative increasing financial transaction clearing times, the potential for fraud risks will naturally rise. Simply put, faster payments = faster fraud.
  • The potential for criminals to exploit this new innovation is expected to increase as consumer adoption increases.
  • Bad actors might attempt to take over your user's account and attempt to execute an outbound RTP push payment. 
  • Inbound RTP risk is something to consider as well, as bad actors might try to establish accounts on your platform and act as payees of illicit RTP transactions. 

Play:

The use of historical customer data along with implementing additional security measures is the key to managing RTP risk. 

Take the following actions to make detection of RTP abuse easier:

  • Deploy a manual “review and approval” process for high-dollar / high-risk transactions. 
  • Implement a real-time monitoring strategy that can automatically take action based on historical customer data. 
  • Add friction (such as 2FA to a known mobile phone number before executing the actual transaction) as this can act as an added security layer. 
PRO TIP:

Use 2FA and “review and approve” as friction points for high-risk transactions

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Scenario: Blockchain (cryptocurrency on the chain)

Scenario: Blockchain

A cryptocurrency is a form of currency that exists digitally on the Blockchain. Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins.

Reward:

Risk:

  • Crypto is unique as it doesn't rely on banks to verify transactions.
  • Blockchain is another form of peer-to-peer decentralized distributed ledger technology that makes the records of any digital asset transparent and unchangeable. 
  • It works without involving any third-party intermediary, meaning, Blockchain can be defined as a shared ledger, allowing all connected computers to maintain a single, secured, and immutable ledger.
  • Blockchain can perform user transactions and in order to do so, all one needs is to have a wallet.
  • Same as for P2P, refunds are nonexistent in cryptocurrency.
  • Any currency sent to a wallet cannot be recovered after the transaction occurs. 
  • Bad actors exploit the fact that many cryptocurrency users don’t fully understand how to treat, trade, and protect their digital assets.

Reward:

  • Crypto is unique as it doesn't rely on banks to verify transactions.
  • Blockchain is another form of peer-to-peer decentralized distributed ledger technology that makes the records of any digital asset transparent and unchangeable. 
  • It works without involving any third-party intermediary, meaning, Blockchain can be defined as a shared ledger, allowing all connected computers to maintain a single, secured, and immutable ledger.
  • Blockchain can perform user transactions and in order to do so, all one needs is to have a wallet.

Risk:

  • Same as for P2P, refunds are nonexistent in cryptocurrency.
  • Any currency sent to a wallet cannot be recovered after the transaction occurs. 
  • Bad actors exploit the fact that many cryptocurrency users don’t fully understand how to treat, trade, and protect their digital assets.

Play:

Customer education along with the implementation of a robust on-chain monitoring solution is critical.

Deploy the following strategy to keep your customers safe:

  • Develop programs to educate your users on how to protect their digital assets.
  • Monitor both on-ramp and off-ramp activities. 
  • Utilize tools such as network analysis to better understand correlations between users and wallets on your platform.
  • On-chain monitoring vendors can provide additional risk indicators for specific wallets based on historical activity on the chain.
PRO TIP:

Use vendor for on-chain monitoring, and keep close tabs on off-ramp activity. Implement this rule using Unit21 for the fastest results.

Industry Standard

With Unit21

Rule Strategy

1-2 Days based on availability of analytics team

15-20 minutes

Rule Creation

Dependent on engineering resources*

5-10 minutes

Submitting Ticket to Engineering

1 Day

Not required

Engineering Resources to Build & Edit Rules in Software

2-3 weeks (Dependent on resources)

Not required

Total Time for Rule Strategy for Deployment

3-4 weeks

30-45 minutes

Industry Standard

Rule Strategy

1-2 Days based on availability of analytics team

Rule Creation

Dependent on engineering resources*

Submitting Ticket to Engineering

1 Day

Engineering Resources to Build & Edit Rules in Software

2-3 weeks (Dependent on resources)

Total Time for Rule Strategy for Deployment

3-4 weeks

With Unit21

Rule Strategy

15-20 minutes

Rule Creation

5-10 minutes

Submitting Ticket to Engineering

Not required

Engineering Resources to Build & Edit Rules in Software

Not required

Total Time for Rule Strategy for Deployment

30-45 minutes

* Based on a survey we found average risk teams get less than 15 hours of engineering time a week

Additional Resources:

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Scenario: Wires

Scenario: Wires

Wires are another form of electronic payment. Although there are some similarities to ACH transfers, there are important differences. Banks in the United States usually route wire transfers through the Federal Reserve Wire Network (Fedwire). The network operated by the 12 Federal Reserve branches handles millions of transactions worth tens of trillions of dollars on monthly basis.

Reward:

Risk:

  • Introducing wire transfers can allow your organization to accept international payments as well as make domestic payments faster because wire transactions usually clear the next business day compared to 3-5 business days via ACH rail.
  • Wires are inherently riskier than ACH transfers. If an ACH transfer is sent by mistake, it may be reversible, but this is not the case with wires.
  • Wires are inherently riskier than ACH transfers. If an ACH transfer is sent by mistake, it may be reversible, but this is not the case with wires.
  • Introducing wires on your platform can potentially expose your users to several different attack vectors like the old “Nigerian prince” scams, Social Security Scams, phishing attempts followed by account takeover, and more. 

Reward:

  • Introducing wire transfers can allow your organization to accept international payments as well as make domestic payments faster because wire transactions usually clear the next business day compared to 3-5 business days via ACH rail.

Risk:

  • Wires are inherently riskier than ACH transfers. If an ACH transfer is sent by mistake, it may be reversible, but this is not the case with wires.
  • Wires are inherently riskier than ACH transfers. If an ACH transfer is sent by mistake, it may be reversible, but this is not the case with wires.
  • Introducing wires on your platform can potentially expose your users to several different attack vectors like the old “Nigerian prince” scams, Social Security Scams, phishing attempts followed by account takeover, and more. 

Play:

The best way to prevent wire transfer fraud is to separate the action your customer takes to request a wire, and the actual money transfer to allow a manual review.

Because including wire transfers might open your customers up to risk in that they might not be able to recover their funds after sending them, it is imperative to implement the following steps to protect customers:

  • Enable a larger scope of control over the wires by separating the action that the customer takes on your platform from the actual act of sending the wire away. 
  • Allow the opportunity for customer profile review and manual verification.
  • Create friction on the action the user takes on your platform, for instance, add a two-step verification process.
  • Limit the number of transactions and the amounts per single business day based on internal customer segmentation.  
PRO TIP:

Create flexible limits based on historical transactions and existing collateral. 

Additional Resources:

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Scenario: Buy Now Pay Later (BNPL)

Scenario: Buy Now Pay Later (BNPL)

Buy Now Pay Later (BNPL) is essentially a financial offering that enables consumers to purchase goods, products, or services without paying for them at once and at the time of purchase. Examples of BNPL companies include Klarna, Affirm, Afterpay and Sezzle.

Reward:

Risk:

  • Buy Now Pay Later provides great growth opportunities both for consumers and retailers.
  • BNPL is becoming more and more popular these days, especially among millennials who are looking for flexible financing solutions.
  • According to some researchers, the BNPL market is estimated to reach around $3.9 trillion by 2030.  
  • In today’s BNPL business models, most of the risk is assumed by the provider of the service.
  • While the merchant (the provider of goods, products, or services) usually gets paid the same day the full amount, the borrower is responsible for making the monthly installments on time. In case the installments are not met, it is up to the provider of the service to collect the funds.
  • Introducing wires on your platform can potentially expose your users to several different attack vectors like the old “Nigerian prince” scams, Social Security Scams, phishing attempts followed by account takeover, and more. 

Reward:

  • Buy Now Pay Later provides great growth opportunities both for consumers and retailers.
  • BNPL is becoming more and more popular these days, especially among millennials who are looking for flexible financing solutions.
  • According to some researchers, the BNPL market is estimated to reach around $3.9 trillion by 2030.  

Risk:

  • In today’s BNPL business models, most of the risk is assumed by the provider of the service.
  • While the merchant (the provider of goods, products, or services) usually gets paid the same day the full amount, the borrower is responsible for making the monthly installments on time. In case the installments are not met, it is up to the provider of the service to collect the funds.
  • Introducing wires on your platform can potentially expose your users to several different attack vectors like the old “Nigerian prince” scams, Social Security Scams, phishing attempts followed by account takeover, and more. 

Play:

While BNPL is different from traditional lending, similar principles and rules might apply if you’re considering entering this market.

Here are some things to consider before offering BNPL to your customers:

  • Perform due diligence, KYC, and/or KYB as well as underwriting. This is the key to success and should limit the access of bad actors to the product. 
  • For synthetic or first-party fraud (initially good users who try to get away from repaying the loan) additional risk vectors should be considered. 
  • Collect risk insights beyond the PII of the borrower, especially around the phone number, address, email, device, and IP as this will provide additional insights in order to keep the bad actors away from your platform.
PRO TIP:

Report confirmed fraud cases to the bureaus.

Additional Resources:

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Scenario: Referral & Rewards Programs

Scenario: Referrals and Rewards Programs

Referral and rewards programs are used as a way to incentive customers to spread the word about your platform, app, or eCommerce brand by exchanging goods, services, or monetary prizes for new customer referrals or when certain spending thresholds are achieved.

Reward:

Risk:

  • Offering referral programs for existing customers is a great way to engage with your customer base and promote your brand and scale acquisition.
  • Referral marketing can be used to your advantage by creating a stronger bond between the customer and the brand. 
  • Bad actors see Referral programs as “free money” and they will get out of their way to get as much as they can out of it.
  • The most common types of referral fraud include the creation of fake email accounts and utilizing them to onboard to your platform and publishing referral codes on public forums.

Reward:

  • Offering referral programs for existing customers is a great way to engage with your customer base and promote your brand and scale acquisition.
  • Referral marketing can be used to your advantage by creating a stronger bond between the customer and the brand. 

Risk:

  • Bad actors see Referral programs as “free money” and they will get out of their way to get as much as they can out of it.
  • The most common types of referral fraud include the creation of fake email accounts and utilizing them to onboard to your platform and publishing referral codes on public forums.

Play:

These programs can be beneficial for promoting brand awareness and influencing new customer acquisition when implemented thoughtfully.

Deploy the following actions to avoid being taken advantage of:

  • Limit the number of times a customer can use his/her referral code.
  • Offer non-monetary rewards like product-related gifts or loyalty points for each referred customer.
  • Reward your customers based on product engagement (purchases or utilization) not solely invites. 
  • Constantly monitor the referral program performance by looking at the login session and detecting similarities between the users who initiated the invite and the user who ended up onboarding the platform, such as IP addresses, email domains, and device fingerprints.
PRO TIP:

Non-monetary rewards are safer. Work with growth and acquisition teams to understand the true source of the users.

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Modern Fraud Prevention: Final Thoughts

We know that today’s fraudsters are more well-funded, technologically savvy, and agile than they've ever been before. With fraud schemes constantly evolving, the weight falls on fraud professionals to understand that mitigating fraud risk requires continuous effort.

For Fintechs, Neobanks, and Crypto companies like Chime, Binance, and other financial institutions to stay ahead of the game, they have started to view fraud detection as a dynamic, proactive process instead of adopting a “set it and forget it” mentality. Organizations that fail to do this run the risk of increasing fraud losses and stagnating growth.

To truly balance fraud prevention with growth objectives, your organization must adopt technology that can be as agile, flexible, and adaptable as you need to be when new fraud schemes arise.

Unit21 is a risk and compliance infrastructure that allows fraud prevention professionals to run the plays outlined in this guide in a fraction of the time that it would take to deploy them as compared to the industry standard. Unit21’s customizable transaction monitoring and case management solutions put fraud teams in the driver's seat.

This means catching and preventing more fraud, faster. All without the overhead of additional engineering resources. With Unit21, your engineering teams can focus on delivering better customer experiences and revolutionary products while your risk team keeps your customers safe. 

Industry Standard

With Unit21

Rule Strategy

1-2 Days based on availability of analytics team

15-20 minutes

Rule Creation

Dependent on engineering resources*

5-10 minutes

Submitting Ticket to Engineering

1 Day

Not required

Engineering Resources to Build & Edit Rules in Software

2-3 weeks (Dependent on resources)

Not required

Total Time for Rule Strategy for Deployment

3-4 weeks

30-45 minutes

Industry Standard

Rule Strategy

1-2 Days based on availability of analytics team

Rule Creation

Dependent on engineering resources*

Submitting Ticket to Engineering

1 Day

Engineering Resources to Build & Edit Rules in Software

2-3 weeks (Dependent on resources)

Total Time for Rule Strategy for Deployment

3-4 weeks

With Unit21

Rule Strategy

15-20 minutes

Rule Creation

5-10 minutes

Submitting Ticket to Engineering

Not required

Engineering Resources to Build & Edit Rules in Software

Not required

Total Time for Rule Strategy for Deployment

30-45 minutes

* Based on a survey we found average risk teams get less than 15 hours of engineering time a week

Interested in discovering how Unit21 can be used to execute the plays listed here?

Schedule a free consultation with our Head of Fraud Risk, Alex Fauvisovich. Alex has been fighting financial fraud for the past 13 years and has led the implementation of fraud prevention technology in several businesses. As a professional fraud fighter and subject matter expert, he can show you how to set up an effective fraud program that will stop bad actors, protect your bottom line and surpass your growth goals.

Schedule your free fraud consultation.

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