Fuel on the Fire: How COVID-19 sparked a global payments fraud pandemic – and how to fight back

As the rapidly spreading coronavirus spurred lockdowns and ongoing social distancing measures around the world, consumers flocked to digital channels to replace or supplement face-to-face interactions. Mobile apps and online channels correspondingly mushroomed.

In the US, for example, banks saw mobile business grow 50% in the first half of 2020. New mobile app registrations spiked 200% in the weeks following the first “stay at home” orders. For many retail giants, burgeoning online shopping propelled record e-commerce sales – and a further embrace of contactless payments by consumers.

But even as this momentous and rapid shift to digital presented a virtual lifeline to consumers in a time of crisis, it fueled a multibillion-dollar surge in payments fraud worldwide. According to one senior fraud management exec at a global card processor:

“We have seen an increase of almost 35% in fraud attempts, which indicates that criminals are more active in breaking through digital channels, taking advantage that fraud strategies leverage normal behavior. Nothing is normal from a transaction perspective in 2020.”

Mitigating fraud amid a “new normal”

Javelin Strategy & Research examined the shifting digital payments fraud landscape amid a period of rapid change last year, conducting independent interviews of financial services executives in payments, risk management and security from 20 countries in North America, South America, Europe, Africa and Asia Pacific.

The fortuitous timing of the study enabled Javelin to capture the pre-pandemic landscape through the various stages of coronavirus-driven shutdowns and early recovery efforts. The study’s findings continue to color today’s landscape. Among them:

• Odds have shifted in the criminals’ favor due to the growing number of digital payment and customer engagement methods. Fraudsters and criminal networks’ arsenal of tricks is as advanced as the technologies used to detect their illicit activities. Schemes like social engineering, phishing, and identity theft have increased in frequency and sophistication. Cross-border schemes have become commonplace, too – and the similarities seen across geographies hint that the bad guys coordinate and share information more openly than their financial services targets.

• Merchants’ rapid adoption of new digital payment modalities around the world is putting them at tremendous risk. For example, the use of QR code-based payments has exploded, particularly in developing countries, because it provides a fast, touch-free and cash-free way to transact. However, the accelerating speed of adoption means merchants aren’t adequately prepared for how new payment methods can be exploited for fraudulent means – or how to mitigate those threats. Fraudsters, as always, are quick to take advantage.

• Phishing schemes are particularly rampant, leading to a massive uptick in identity crimes. The identity crime surge hinted in the study has come to fruition. According to the U.S. Federal Trade Commission, reports of identity theft jumped 113% from 2019 to 2020, skyrocketing to nearly 1.4 million cases. Wider adoption of integrated identity-proofing technologies, particularly in the financial and government sectors, can help reverse this trend.

Digital identity: Establishing the “who” behind each transaction and interaction

While banks, other financial services organizations, and retailers have a good understanding of physical identity and protecting in-person transactions, most haven’t developed a means of understanding and establishing an all-inclusive digital identity. That information gap has proven significantly problematic. Is the person connecting to that mobile app or website who they purport to be?

Organizations could answer that question much more accurately far more often, if only they’d leverage, and integrate, more data. Data on the digital reputation of the given device. Biometrics reflecting how the device is being use. Geolocation data to establish where the device is being used. Email and telephony records that establish history. These data and more, analyzed together and in real-time, paint a virtual picture that can be used to establish and validate a customer’s digital identity.

The next critical step is to institute holistic decisioning, from the point of application, through digital authentication, through financial and non-financial transactions, and even post-transactional engagement – the entire breadth of the customer journey. Harvesting and integrating all the valuable behavioral data along the way is critical to making each subsequent decision.

Too often financial firms think about the data and analytics only at the time they are approving or declining a transaction. Analytics must come into play in terms of how they leverage the data, how they enrich the data, and how they identify which data is most important in making fraud-based and other decisions. And they must use those analytic capabilities at each and every decision point.

Digital payment transformation and the path forward

The payments landscape has changed – and continues to change – very quickly. Effectively combating fraud while balancing customers' expectations during this period of rampant digital payments adoption and beyond will require agility. Such agility hinges on:

1. Robust data streams from an ecosystem of digital data providers;
2. A data integration utility to quickly ingest new data providers as needs continue to change;
3. Hybrid, multilayered analytics executed in real-time; and
4. Integrated architecture to provide flexible, automated, and centralized decision-making capabilities.

Since the start of the pandemic, financial services organizations have tirelessly innovated to meet customers’ need for flexibility and immediacy. As they seek to build better in a post-vaccine world, they must redefine how they protect themselves and their customers from the associated risks. That starts with understanding their customers in a digitized landscape and adjusting their anti-fraud technologies to reflect new and evolving realities. Advanced analytics delivers the agility to adapt to today’s climate while also being prepared for what’s yet to come.