What is fraud prevention?

Fraud prevention is the steps and actions taken by businesses to thwart fraudulent activities. Essentially, it's about safeguarding a company and its customers, using sophisticated software to detect abnormal behavior, and establishing formidable security systems.

Fraud costs merchants around £267 billion every year globally, and UK consumers a staggering £1.2 billion[1] in 2022. From identity to education, retail to finance, fraud is an ever-evolving activity that impacts almost every part of our lives.

Despite us all being more digitally savvy than ever, the increasing digitalisation of business has made it easy for criminals to undertake complex fraud activity from anywhere in the world, and it hits us where it hurts – our wallets.

What is fraud prevention?

Fraud prevention is the steps and actions taken by businesses to thwart fraudulent activities. Essentially, it’s about establishing security systems and using sophisticated software to detect abnormal behaviour and safeguard a company and its customers.

The primary aims of fraud prevention are to:

  • protect the company’s financial resources
  • maintain the confidence of customers
  • ensure the integrity of all transactions and operations

By being proactive and tackling fraud risks, companies can protect themselves from harmful impacts and preserve smooth operations and trust.

What is fraud?

Many of us have anecdotal tales of the time a bogus email encouraged us to click on an untrustworthy link. It’s an unfortunate fact that fraud is very common these days. In fact, it’s estimated that one in four people is a victim of fraud and globally, merchants are expected to incur around £267 billion in fraud costs and losses every year.

But what exactly is fraud, particularly when it comes to banking and financial services?

First-, second, and third-party fraud

Despite new fraud trends emerging all the time, fraudulent activity falls into first-, second-, and third-party.

First-party fraud is when someone fakes their own identity or gives false information for financial gain.

Second-party fraud is when a person willingly hands over their identity or personal information for them to commit fraud.

Third-party fraud is where a person’s identity or personal information is used without their knowledge or consent. This is commonly known as identity theft.

What is the impact of fraud?

On businesses

On consumers

Financial losses
The most direct impact of fraud is financial. Businesses can face substantial monetary losses due to the fraudulent transactions themselves, or the need to reimburse affected customers.

Financial losses
As with businesses, the financial losses that come with fraudulent activity are the most significant. Consumers can lose personal funds which can in turn affect their ability to pay the mortgage and bills.

Operational costs
Responding to fraud can consume a business’s resources. This in turn is likely to divert attention away from core operations. The time and effort spent in addressing fraud, implementing preventive measures, and dealing with customer concerns can be substantial.

Emotional stress
Victims of fraud often experience significant emotional distress. The feeling of being violated can lead to a lack of trust in future transactions, both online and offline.

Reputational damage
Fraud can lead to a tarnished reputation. Consumer trust is hard to earn and easy to lose, and incidents of fraud can deter potential customers and erode the loyalty of existing ones.

Loss of time
The amount of time and effort needed to recuperate any losses, is not only frustrating but can leave a significant negative impact on a consumer’s perception of a brand.

Fraud within banking and financial services

All sectors are subject to their own fraud risks and scams. Unfortunately, owing to the nature of business, banking and finance are often considered even higher risk. In fact, 52% of banks have reported high levels of concern about fraud, making fraud detection in the industry a key priority.

Banking fraud is a financial crime that uses illegal means, such as identity theft, data breaches, and phishing attacks, to take money and assets from banks, credit unions, fintechs, and other financial institutions.

Unfortunately, this type of fraud can be tricky to detect, as it’s often misclassified as a credit risk or written off as a loss. Instead, there should be appropriate fraud detection and prevention measures in place to help manage the risk of an attack or mitigate any significant losses should one happen.

What are the most common types of fraud?

Type of fraud

What is it?

Ways to prevent it

Identity theft or fake account fraud

The illegal use of someone else’s personal information to set up a new account or for any other financial gain.

Enforce strict data security policies, regularly train employees on data protection, and implement multi-factor authentication for transactions.

Internet or cyber fraud

Any and all online fraud activities, including phishing, hacking, and data breaches.

Invest in top-tier cybersecurity measures, keep security protocols up-to-date, and hold regular employee training on cyber threats.

Credit card fraud

The unauthorised use of a credit card to make transactions or withdraw funds.

Utilise secure and modern payment systems, integrate fraud detection tools, and train staff to spot unusual transaction activities.

Bank fraud

The illegal acquisition of money, assets, or other property from a bank or financial institution.

Implement rigorous internal controls for financial dealings, conduct frequent financial audits, and use secure, encrypted banking methods.

Insurance fraud

Acts intended to defraud an insurance process, such as inflating claims or fabricating incidents.

Perform detailed checks on insurance claims, keep comprehensive records, and work closely with insurers to detect fraud.

Investment fraud

All deceptive practices in investments, including promising unrealistic returns.

Thoroughly vet all investment opportunities, educate your team about the risks of investment scams, and maintain transparency in all investment dealings.

Tax fraud

Any illegal action to evade paying the appropriate taxes.

Ensure all tax filings are accurate and compliant, use professional accounting services, and regularly conduct internal reviews.

Mail and telemarketing fraud

Using postal services to commit fraudulent acts, such as sending deceptive offers. Telemarketing fraud involves using phone calls to deceive people, often through misleading sales pitches.

Train staff to identify fraudulent mail, establish protocols for managing unsolicited mail and unexpected calls, maintain an updated do-not-call list, and use secure communication methods for sensitive information.

Application push payment (APP) fraud

When someone is tricked into sending large amounts of money to a fraudster who is posing as a legitimate and trusted individual or business.

Consumers should question any large bank transfer requests, including diverting a payment or moving savings. Genuine organisations won’t mind waiting for payments, so they should never be rushed. And all payment details should be checked via a bank or firm over the phone.

Romance scams

Fraudsters creating fake profiles on dating websites or social media to start a relationship with a victim. From there, they’ll earn their victim’s trust and convince them to send money for a fabricated issue.

Consumers should be aware that romance scam fraudsters will usually share very little about themselves and try to quickly move their conversations away from an app and onto email or text. They’ll also be hesitant to meet in person and have lots of excuses as to why they can’t. All of these should all be considered warning signs.

Bonus abuse

Fraudsters creating multiple accounts to claim promotions and incentives run by gambling and gaming operators.

Having stricter and more complex requirements can put off a lot of fraudsters owing to the time and effort needed. Blocking risky territories that are prone to bonus abuse can also help, as can lowering the monetary value of payouts.

What are the top five fraud risks?


1. A boom in digitalisation

It’s said that the Covid-19 pandemic accelerated digital adoption by up to 10 years, with consumers having no choice but to interact with organisations online. For many, this wasn’t too much of an issue, but for those who weren’t already digitally savvy it presented a steep learning curve.

Since then it’s estimated that there are 4.6 million incidents of fraud in the UK each year, with 26% of people falling victim to identity theft, 23% to online fraud and 20% enduring an online account takeover.


2. An increase in digital identities

Digital identities are becoming essential for lots of businesses. Whether managing a shopping account that includes credit card information or keeping a search history record, customers are willing to create individual profiles per business, for quick and easy access to products and services.

This sharp increase in digital identity creation can, however, make it tricky for organisations to know who they’re actually dealing with. While physical and behavioural biometrics are amongst consumers’ most trusted security methods, with 73% of consumers preferring them. PIN and passwords remain the most popular security technologies despite their susceptibility to fraud.


3. An ever-changing credit market

Alternative financing options are transforming the credit landscape with almost 1 in 10 UK consumers now using Buy Now, Pay Later providers to make online purchases. Buy Now, Pay Later is also bringing new consumers into the credit market, including those who may not be eligible for traditional lending products, like bank loans and credit cards.

However, one of the things that makes the lending so convenient and accessible is also one of its downfalls. A light-touch approach to security checks, such as ID verification, can make it easy for fraudsters to use false or stolen information to create new accounts or take over existing ones.


4. Unchecked customer profiles

For lenders, it can be hard to differentiate between first-party fraud and credit risk. A consumer could exaggerate or withhold information to access the products and services they need, but it may only be identified as first-party fraud.

This means it’s vital that organisations keep reviewing their existing customer risk profiles. Not just at the application stage, but throughout the customer journey.


5. Generative AI

While generative AI is driving efficiencies and improvements in lots of areas, it’s also being adopted by fraudsters to create highly personalised and convincing scams. By analysing publicly available social media profiles and other personal information, scammers can use generative AI to create messages tailored to individual victims or fake phone calls that mimic the victim’s voice and mannerisms.

Using the technology in this way makes it difficult to distinguish between real and fake communication, and can lead to increased vulnerability and susceptibility to fraud.

What are the key ways to help prevent fraud?

Despite the rapid evolution of scams and fraudulent activity, there are a number of fraud prevention measures you can take to help protect both your business and customers.

First and foremost, we recommend listing out all your current fraud controls for review, so you can really dig into their purpose and effectiveness. Examining your current measures against our tried-and-trusted fraud prevention questions will also help test for robustness.


Know your customer inside out

If you’re to spot the differences between a fraudster and a genuine customer, you’ll need to know your customer inside out. Now’s the time to think about the digital identity of your consumers, so you can better and more easily recognise something that seems off. An in depth profile analysis will also help make sure you have the right fraud detection techniques and prevention solutions in place.


Implement fraud risk scores

When managing and assessing fraud risk, fraud risk scores are key. These are numerical indications of how risky a particular transaction may be, and with the right tools in place you can use them to automatically approve, reject, or review certain applications or actions. This in turn can save time and money by streamlining the customer journey for tasks such as account verification.


Create a multi-layered approach

By using a multi-layered approach, you can dial fraud prevention measures up or down to make sure the level of friction introduced matches the level of risk involved. Using different tools for different consumers at all points of the customer journey will help you tailor the best solution for both the business and consumer.


Continually undertake fraud checks

Just because a customer wasn’t fraudulent during the application stage doesn’t mean they won’t be later on in their journey. Because of this, it’s important to consider fraud prevention throughout the whole customer lifecycle, keeping the right checks in place at appropriate stages.


Get your customers involved

Best-in-class practice shows that asking your customers what they want and educating them on online security helps reduce fraud further. This could be as simple as asking them to choose whether they want to access their account by fingerprint or facial recognition and is a good way to tailor fraud prevention to their preferences, making it more likely they’ll comply.


Adopt AI and machine learning in fraud prevention

While generative AI can be utilised by fraudsters to undertake sophisticated scams, its innovation goes both ways. AI algorithms and systems can be used to analyse large volumes of data quickly and without error, in order to uncover anomalies and patterns that could suggest fraudulent activities are taking place. 35% of businesses are planning to add machine learning to help minimise fraud risks, but we believe this number will increase rapidly well into 2024.

Put a fraud prevention strategy into place

Knowing you need to create a fraud prevention strategy is one thing, but managing and assessing the risks before implementing prevention measures isn’t always as simple.

Many fraud risk management strategies are built on five principles:


1. Fraud risk assessment

which is the process of understanding everything to do with your organisation’s vulnerabilities and current prevention controls.


2. Fraud risk governance

which captures the logistical details around a fraud risk assessment and the roles and responsibilities, procedures for fraud events and ongoing monitoring plans.


3. Fraud prevention

which encompasses the right controls and procedures to help stop any fraudulent activity before it takes place.


4. Fraud detection

which are the systems and tools you have in place to monitor anomalies and risky behaviours, which can then be flagged and reported as suspicious.


5. Monitoring and reporting

which is a proactive risk mitigation technique that helps your business evaluate potential fraud threats before they become actual risks.

However, as with all solutions, there’s nuance and regulation requirements with each layer that can be difficult to decipher alone. Working with an experienced fraud prevention solutions consultant on your fraud prevention strategy will help make sure your business minimises risk and meets all relevant regulations.

What data is required for fraud prevention?

There’s a number of data sources you want to be sure to include in your fraud prevention. Collecting and effectively analysing these data types will help you build a comprehensive and proactive fraud detection system, that’s also responsive to emerging threats.

The data sources to include are:

Collecting data such as customer names, addresses, contact details, and payment information can help to verify a customer’s identity and track any inconsistencies in their account activities.

Details about transactions, such as amounts, locations, time stamps, and frequency, help in identifying patterns that deviate from the norm. This in turn can be an indication of fraudulent activity.

Information about a device that’s used for transactions, such as the device type, IP address, or location, can help uncover if a transaction is coming from something or somewhere unusual and suspicious.

Past transaction records and customer behaviour patterns are important for establishing baselines to compare current activities with. This historical perspective helps in identifying anomalies.

Integrating external data sources, such as credit bureau data, public records, and blacklists, can bolster fraud detection by providing a broader context in which to evaluate transactions.

What are the issues with fraud prevention?

While crucial for all businesses to have, fraud prevention strategies aren’t a fail-safe measure and come with their own set of challenges.

When creating your strategy, the key things to consider are:

Impact on customer experience

Enhanced security measures, like multi-factor authentication or robust identity checks, can sometimes slow down transactions. This added friction may deter customers who are seeking a smooth and quick experience.

Increased costs

Implementing advanced fraud detection technologies is a significant investment, and more often than not comes with a hefty price tag. As well as the initial setup costs, ongoing maintenance and staff training also add to the financial burden.

Risk of false positives

Yes, it feels ironic to say but some fraud detection systems can actually be too good. Many highly sensitive systems can mistakenly flag legitimate activities as fraudulent. This can lead to unnecessary delays for customers and extra work for staff to resolve, affecting both customer satisfaction and operational efficiency.

Of course, it’s frustrating that even the means of preventing fraud come with their own issues. But by being aware of them you can ensure a carefully curated balance of strong fraud prevention at a reasonable cost, while maintaining a positive customer experience.

How can we help?

If your business doesn’t already have fraud detection and prevention solutions, now is the time to get them sorted. And even if you do have a strategy in place, with the constant evolution of scams it’s wise to audit your process to be sure your business can cover the ever-changing threat of fraud.

To better understand the changing fraud landscape and regulations, and stay on top of emerging threats, our Annual Identity and Fraud Report can help. We share real consumer and business opinions alongside stacks of data so you can better understand how to create and implement your fraud prevention strategy.

Download the 2023 UK Identity and Fraud Report.

Copy Link Copied to clipboard
Post tagged in: Bank Validation, Fraud