Fraud is a growing problem that costs businesses in retail, insurance, financial services, and other industries billions of dollars every year. For example, according to Juniper Research in 2023, companies in the e-commerce sector lost $38 billion to fraud. What’s even more concerning is that this number is expected to skyrocket to $362 billion by 2028. In financial services, the problem is just as severe, with 25% of businesses losing over $1 million to fraud last year alone.
Fraud can come from outside attackers or even from within an organisation. These incidents not only risk exposing customers’ sensitive information but also result in huge costs for companies to manage and recover. Because of this, businesses are taking fraud prevention and mitigation seriously to reduce risks and protect their customers.
Managing fraud risk is essential for businesses that want to thrive and maintain trust in today’s fast-paced world. Fraud won’t disappear on its own, so companies need a strong plan to stay ahead. A proactive approach can safeguard both business growth and customer confidence. In fact, according to a report by Ping Identity, most security and business leaders (76%) say that addressing identity fraud is their top priority. Let’s explore the best ways to manage fraud risks, with a focus on protecting identities.
What is Fraud Risk Management?
Fraud risk management is the strategy businesses use to identify and mitigate threats of fraud throughout their operations. It’s a proactive approach that requires integrating counter-fraud measures across every stage of the user journey to prevent and reduce the impact of fraudulent activities effectively.
With the rising cost and prevalence of identity fraud, one key area of concern is insurance fraud, which has evolved with new techniques and methods that can severely affect businesses and consumers alike.
Some of the emerging types of insurance fraud include:
- Ghost Broking: Fraudsters pose as legitimate insurance agents, selling fake policies to unsuspecting customers. Victims only discover they have no real coverage when they try to make a claim, often leaving them with significant financial losses.
- Staged Accidents: This involves criminals deliberately causing accidents to file exaggerated or fake insurance claims. They may also recruit accomplices to act as “witnesses” or additional claimants to maximise payouts.
- Digital Identity Fraud in Claims: Cybercriminals use stolen identities to file fraudulent insurance claims online, taking advantage of weak identity verification processes. This not only affects insurers financially but also damages the reputation of their services.
- Policy Padding: Policyholders inflate the value of their claims to receive higher payouts. For instance, after a genuine incident, they may claim damages that didn’t occur or exaggerate repair costs.
- Fake Policy Cancellations: Scammers contact policyholders pretending to be their insurer, convincing them to cancel their existing policy and transfer funds for a “new policy,” which turns out to be fraudulent.
To address these new threats, businesses must implement advanced fraud detection measures tailored to the insurance sector, such as verifying identities during policy issuance and claim processing, monitoring suspicious claim patterns, and educating customers on how to identify and avoid fraud.
Why is Managing Fraud Risk Crucial?
The significance of managing fraud risk cannot be overstated:
Financial Losses: Businesses face substantial financial losses due to fraud. For instance, companies in the e-commerce sector lost $38 billion to fraud in 2023, with projections indicating a potential loss of $362 billion between 2023 and 2028.
Reputational Damage: Incidents of fraud can erode customer trust, leading to reputational harm that may take years to rebuild.
Legal and Regulatory Consequences: Failure to manage fraud risks can result in legal penalties and non-compliance with regulatory standards, further exacerbating the impact on the organisation.
Components of a Solid Fraud Risk Management Strategy
To effectively manage fraud risk, organisations should consider implementing the following components:
Identity Verification
Identity verification is all about making sure that a person’s digital identity matches who they really are in real life. This process helps prevent someone from pretending to be someone else online. Techniques like live-face capture, where a person takes a live photo of themselves and matches it with their government-issued ID, can confirm their identity. Another method is linking digital identities to verified devices, such as a mobile phone or computer, which creates an additional layer of security.
Multi-Factor Authentication (MFA)
Multi-Factor Authentication adds extra steps to ensure that only the rightful user can log in. Instead of just using a password (something they know), the system also asks for other proofs, like a code sent to their phone (something they have) or a fingerprint or face scan (something they are). These additional layers make it harder for fraudsters to access accounts, even if they have stolen a password.
Behavioural Monitoring
Behavioural monitoring focuses on observing how users interact with a system. This includes looking at things like how they type, move their mouse, or interact with the website or app. These patterns are unique to each person. If the system notices unusual behaviour—such as someone suddenly using a different typing speed or accessing the account from an unexpected location—it can flag the activity as suspicious. This continuous monitoring helps catch fraudulent actions early before they cause damage.
Customer and Employee Education
One of the simplest and most effective ways to reduce fraud is education. By teaching customers and employees about common fraud schemes, such as phishing emails or fake websites, they can learn to recognise and avoid these threats. Regular training sessions, workshops, or even short guides can increase awareness. When people know what to watch out for, they are less likely to fall victim to scams.
Policy-Based Access Control
Policy-based access control ensures that only the right people can access sensitive information. It works by creating rules based on things like someone’s job role, level of security clearance, or specific conditions like where they are accessing the system from or what time it is. For example, a company might allow an employee to access financial data only during working hours from the office but block access from an unknown device late at night. This approach limits the risk of unauthorised access.
Verified Credentials
Verified credentials are digital versions of important information that have been cryptographically secured to prevent tampering. For instance, a digital credential could confirm someone’s employment status, educational degree, or account ownership. Since these credentials are difficult to fake and can be monitored when used, they provide an extra layer of security. They also help organisations reduce the risk of fraud, such as account takeovers, by verifying the authenticity of the user.
Risk-Signal Monitoring
Risk-signal monitoring uses automated tools to check for warning signs of fraud in real time. These systems look at things like where a user is logging in from (IP address), their geolocation, and how they are accessing the system. If the system detects something unusual—such as a login attempt from a different country or a device that hasn’t been used before—it can raise an alert or block the activity. By acting quickly, these systems can stop fraud before it happens.
How to Mitigate Fraud if It Happens
Despite robust preventive measures, incidents of fraud may still occur. In such cases, organisations should take the following steps:
Immediate Response: Upon detecting fraud, promptly contact law enforcement and notify affected parties, including customers and regulatory bodies. Timely communication is crucial to mitigate further damage.
Account Freezing: Temporarily suspend compromised accounts to prevent unauthorised transactions and further fraudulent activities.
Investigation: Conduct a thorough investigation to understand the scope and nature of the fraud. This involves analysing affected systems, identifying vulnerabilities, and gathering evidence for legal proceedings.
Customer Communication: Maintain transparent communication with affected customers, providing them with necessary information and support to protect their accounts and personal information.
Enhancing Security Measures: Review and strengthen existing security protocols to address identified weaknesses and prevent future incidents. This may involve updating software, revising access controls, and enhancing monitoring systems.
Bottom line
Fraud risk management is an ongoing process that requires vigilance, adaptability, and a proactive approach. By implementing comprehensive strategies encompassing prevention, detection, and response, organisations can safeguard their assets, maintain customer trust, and keep growing with confidence.