Fraud & COVID-19: Lessons Learned from the 2008 Recession

Spikes in CNP fraud, money mules and social engineering scams are rising - what should fraud managers take away from the successes and failures of the last global economic crisis?

There’s one fraud pattern that’s highly predictable: when the economy goes down, fraud goes up. When it comes to fraud and COVID-19, the Great Recession of 2008 provides some important lessons that can help banks and consumers protect themselves against the increased risk.

A Resurgence of Specific Fraud Types

In 2008, many banks experienced sharp increases in fraud incidents (and losses) due to:

  • Collusive fraud rings in which groups of criminals conspired to defraud a large number of institutions and card issuers.
  • Bust-out fraud perpetrated by individuals with either genuine or synthetic identities, running up high balances and intentionally defaulting after making a few normal-looking payments; up to 15% of debt that banks and issuers move into collections is actually the remains of bust-out fraud.

At the same time, banks doubled down on their commitment to customer service and experience; customer acquisition was a major challenge during the Great Recession, so focusing on the retention of good customers became a priority. Financial institutions balanced the intrusiveness of their fraud detection efforts with their desire to deliver the best customer experience possible.

Turning Up Fraud Defenses—and Customer Education

We at FICO see early signs that collusive fraud rings and bust-out fraud are again on the rise. Here’s what different about fraud during COVID than 2008.

  • Spikes in CNP transactions and related fraud: It’s true that in the wake of the US EMV mandate in 2015, card-not-present (CNP) fraud has risen. But the emergence of COVID-19 has sent CNP use into another dimension, as consumers buy more of everything online, and are encouraged to used contactless payment methods for in-store purchases. Fraud rates have risen commensurately, as well.
  • Phishing attacks are multiplying: Anxious consumers are more susceptible to phishing emails claiming to have information about COVID-19 cures and economic stimulus payments. A large-scale move to work-from-home also creates new susceptibilities for hackers to exploit, such as a fake emails from executives asking for “help” with financial transactions. These emails can plant malware and entice employees with financial access to inadvertently send funds to fraudsters. (Learn more about the latest trends in COVID-themed scams from the recorded webinar “The Rise of Scams – Mitigating the Manipulation of Your Customers and Employees during Times of Crisis,” available by registering here.)
  • Money mule scams are on the rise: Economic uncertainty leads to consumer vulnerability, and more consumers are getting swept up in scams involving “cash prizes” and opportunities to “earn $100,000 from your home!”

To deliver the best customer experience, banks should address the COVID fraud landscape with a combination of increased internal resources and outbound education:

  • Adapt fraud strategies to maintain an excellent customer experience while catching more CNP fraud. Assign more fraud professionals to monitor CNP transaction flows and use adaptive models that reflect changing spending patterns (more online shopping and at grocery stores, less at other retailers).
  • Deliver positive customer experiences at scale with tools like FICO® Customer Communications Services, which delivers automated fraud protection messaging and response through the customer’s preferred channel (text, email, phone call).
  • Review delinquent accounts more closely and use link analysis tools such as FICO® Identity Resolution Engine to uncover collusive networks perpetrating bust-out fraud.
  • Educate customers and employees on criminal tactics such as money muling and phishing, through outbound communications and prominent promotions on banking app home screens.

Through vigilance and education, banks can work together with customers to navigate the COVID financial environment with minimal disruption and losses. For more information on fraud management in the pandemic, see my colleague Liz Lasher’s post, “8 Tips for Avoiding COVID-19 Scams.” Follow Liz (@LizFightsFraud) and me on Twitter @dougoclare.

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