Both rely on using the right ingredients and processes.
Fraud. It’s a word that comes up in conversations across every industry. While there’s a general awareness that fraud is on the rise and is constantly evolving, for many, the full impact of fraud is misunderstood and underestimated.
At the heart of this challenge is the tendency to lump different types of fraud together into one big problem and then look for a single solution that addresses it. It’s as if we’re trying to figure out how to un-bake a terrible cake instead of thinking about the ingredients and the process needed to put them together in the first place. In this article, we’ll look at some of the key ingredients in preventing third-party fraud. But first let’s talk about this type of fraud is and how it impacts credit unions.
What Is Third-Party Fraud?
Third-party fraud—generally known as identity theft—occurs when a malicious actor uses another person’s identifying information to open new accounts without the knowledge of the individual whose information is being used. This type of fraud is unique from first-party or synthetic identity fraud because it involves identifiable victims who are willing to collaborate in the investigation and resolution for the simple reason that they don’t want to be responsible for the obligation made under their names.
Third-party fraud is often the only type of activity that’s classified as fraud by credit unions and other financial institutions. The presence of an identifiable victim creates a high level of certainty that fraud has indeed occurred. That certainty enables credit unions to properly categorize the losses.
Since there is a victim associated with it, third-party fraud tends to have a shorter lifespan than other types. When victims become aware of what’s happening, they generally take steps to protect themselves and intervene where they know their identity has been potentially misused. As a result, the timeline for third-party fraud is shorter, with fraudsters acting quickly to maximize the funds they’re able to amass before busting out.
How Does Third-Party Fraud Impact Credit Unions?
As the digital transformation continues, more and more personally identifiable information is available on the dark web due to data breaches and phishing scams. Given that half of consumers anticipate increasing their online spending in the coming year, we anticipate that the amount of PII readily available to criminals will continue to grow. All of this will lead to an increase in the risk of third-party fraud.
Third-party fraud has been on financial industry’s radar throughout 2020, with account takeover and account opening fraud representing high opportunities for risk.
While we don’t yet know the full financial impact of COVID-19, it’s clear that it has created both opportunity—increased online presence and interaction—and need—in the form of financial distress for credit unions and their members—when it comes to third-party fraud.
Solving the Third-Party Fraud Problem
We’ve examined one part of the fraud problem, and it is a complex one. Continuing my cake metaphor, by following the right steps and including the right ingredients, credit unions can detect and prevent fraud.
Preventing third-party fraud involves two distinct steps.
1. Analytics: Driven by extensive data that captures the ways in which members present their identity—plus artificial intelligence and machine learning—good analytics can detect inconsistencies and patterns of usage that are out of character for the person, or similar to past instances of known fraud.
2. Verification: The advantage of dealing with third-party fraud is the availability of a victim that will confirm when fraud is happening. The verification step refers to the process of making contact with the identity owner to obtain that confirmation. It does require some thought and discipline to make sure that the contact information used leads to the identity owner—and not to the fraudster.
In addition to third-party fraud, it’s important to explore all fraud types, including first-party fraud, synthetic identity fraud and account takeover fraud. Equally important is developing a layered fraud management strategy to help keep your business and customers safe.
Marketing lead, fraud and identity, for CUESolutions Silver provider Experian North America, Costa Mesa, California, Chris Ryan has more than 20 years of experience in fraud prevention and uses this knowledge to identify the most critical fraud issues facing individuals and businesses in North America. Ryan guides Experian’s application of technology to mitigate fraud risk. Let us know if you’d like to learn more about how Experian is using our identity expertise, data, and analytics to detect and prevent fraud.