Types of Transaction Fraud and How to Prevent Them

In this digital age, where transactions are conducted at the click of a button, and data flows seamlessly across virtual channels, fraud continues to grow. From financial institutions to e-commerce giants and beyond, no entity is immune to the sophisticated tactics employed by these nefarious actors. 

Every fraudster looking to compromise a business’s system usually seeks financial gain. This objective manifests through various sophisticated tactics that exploit weaknesses in these businesses' onboarding and transaction processes. The methods used range from identity theft and account takeover to more complex schemes like synthetic identity fraud.

While many businesses have made solid attempts to mitigate fraud at the point of onboarding, much less effort has been put into transaction monitoring. In this article, we discuss the various types of transaction fraud plaguing modern businesses and reveal the best practices for transaction monitoring—a critical line of defence against transaction fraud. 

What is Transaction Fraud

Transaction fraud refers to any unauthorised or fraudulent activity that occurs during a financial transaction. It can encompass various deceptive practices, including unauthorised charges on credit or debit cards, identity theft, account takeover, and fraudulent wire transfers.

Fraudsters often exploit vulnerabilities in payment systems, steal personal information, or use sophisticated techniques to deceive individuals or organisations into providing sensitive financial details. Transaction fraud not only results in financial losses but also damages trust and confidence in financial institutions and online platforms. 

Types of Transaction Fraud  

Discover the four most prevalent types of transaction fraud today, including how they operate and strategies for prevention.

1. Bonus/Referral Fraud

In Bonus/Referral Fraud, attackers exploit promotional offers designed to attract new customers or reward existing ones. This type of fraud typically involves creating multiple fake accounts to gain referral bonuses illegitimately. Fraudsters may use bots or automated scripts to rapidly create these accounts or recruit individuals to sign up using special referral links.   

Bonus/Referral fraud becomes evident when many new accounts or referrals originate from similar sources, exhibit identical patterns of behaviour, or when payouts for referrals disproportionately increase. 

At Smile ID, we have seen identity fraud spike up to 5 times the usual level during referral/bonus periods.

How to prevent Bonus/Referral Fraud 

Deduplication has proven effective in combating this kind of fraud. In practice, deduplication cross-references new signups against biometric data of previous signups and alerts businesses if the same data appears multiple times. Deduplication flags duplicate signups regardless of country, ID type, ID number, name, or date of birth. It is the most effective deterrent for organized attacks on promotional signup codes.

At Smile ID, we have detected over 1.7 million duplicate faces for our customers using, our proprietary deduplication tool.

2. Account Takeover Fraud

Account Takeover (ATO) happens when fraudsters gain unauthorised access to accounts by phishing, credential stuffing or exploiting vulnerabilities. The attacker gathers the victim’s personal information, uses it to breach the account, and then makes unauthorised transactions, steals sensitive information, or uses the account for other illegitimate activities. Victims often realise they’ve been targeted when they notice unauthorised transactions, receive alerts for unusual activities, or find themselves locked out of their accounts.

Traditional means of authentication (passwords, PINs, and OTPs) that are still commonly used are not secure. 

PINs and passwords are often weak and can be guessed or stolen from people. OTPs can be intercepted, and we have seen bad actors who work inside telecoms exploit their access to people's data to initiate and intercept OTPs and steal people's money and accounts. 

How to prevent Account Takeover Fraud

To mitigate Account Takeover attacks, more businesses must implement risk-based analytics alongside multi-factored authentication that moves from traditional means of authentication to include biometric authentication that tests liveness and verifies a person's true identity in real-time.  In addition, customer accounts should be monitored for unusual activities like logins from unknown locations or irregular transaction behaviour, which should trigger identity authentication measures to make sure that customer funds are safe.

3. Money Laundering  

Money Laundering in digital products often involves using online services to disguise the origins of illegally obtained money. Fraudsters might funnel illicit funds through multiple accounts to hide their trail, including those in digital wallets, gambling, or cryptocurrencies. 

This process typically involves a series of complex financial transactions designed to confuse authorities and make the money appear legitimate. Indicators of such activities include unusually large transactions, frequent transfers between accounts, or the use of shell companies and third-party intermediaries. 

How to Prevent Money Laundering

Businesses can mitigate money laundering attacks by conducting AML checks on onboarded customers to confirm if they are on any global watchlists and implementing risk-based security measures on high-risk customers.

Smile ID's AML Check enables businesses to conduct due diligence on customers by swiftly screening them against over 1,100 global watchlists, lists of politically exposed persons, and adverse media publications. Within seconds, the product provides information on whether the screened customers are on any of these lists, along with corresponding details. You can use information to evaluate the associated risks the customers pose.

4. Chargeback Fraud

Chargebacks occur when a consumer disputes a transaction from their issuing bank to obtain a refund because they did not initiate a transaction or, if they did, did not get value for the transaction. 

Consumers often initiate chargebacks because they never received the item or service or because it was not as described. In many cases of chargeback fraud, the original owners of the account initiate the cashback dispute after their stolen details are used to carry out a transaction. 

In other cases, fraudulent customers can attempt to get a chargeback by insisting that they didn’t get value for a transaction when they did. Chargeback fraud affects companies across industries, including eCommerce, payments, wallets, card issuance, cryptocurrency, and more.

How to Prevent Chargeback Fraud 

Like other kinds of fraud, chargeback fraud is much lower with verified customers. Companies can mitigate it by implementing ongoing authentication on their users.

Smile ID’s biometric authentication solution enables businesses to safeguard accounts at login or during a high-value transaction. It also creates time-stamped biometric proof that a transaction was authorised by the account owner in case of chargeback disputes.

Preventing Transaction Fraud with Smile ID

Transaction fraud can come as a surprise to businesses, especially the ones with lax customer onboarding practices. 

However, adopting proactive measures as discussed in this article can help your business stay several steps ahead of bad actors. 

At Smile ID, we have a plethora of solutions to mitigate onboarding and transaction fraud. 

Through our advanced deduplication solution Smile Secure, biometric authentication, AML checks, document verification and more. We empower businesses to identify and mitigate fraudulent activities with unparalleled accuracy and efficiency. 

To access any of these solutions, speak to one of our experts here.