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Digital Fraud Wiki

Your source for the latest fraud intelligence, insights, research, and commentary.

Transaction Fraud Explained: Types, Impact, and Detection

What is transaction fraud?

Transaction fraud is any deceptive activity intended to acquire money goods or services during a financial transaction. It involves schemes or tactics that deceive or exploit others for personal gain. Transaction fraud can occur in various settings, including online transactions, credit card purchases, banking transactions, investment schemes, and more.

What counts as transaction fraud?

Any fraudulent activity that happens during a financial transaction counts as transaction fraud. It can happen during a purchase, a money transfer, a withdrawal, or any other type of transaction. This is what makes transaction fraud different from payment fraud, which only happens during a payment transaction.

Common types of transaction fraud

There are as many different types of transaction fraud as there are financial transactions. But due to our preferred transaction methods, some stand out as the greatest threats. Here are a few:

  • Credit Card Fraud: A type of financial transaction card fraud where someone’s credit card information is used without their knowledge or consent to make purchases. This can include stolen card details, counterfeit cards, or skimming.
  • Identity Theft: The fraudulent acquisition and use of another person’s personal information, such as social security numbers, dates of birth, or financial account details, to conduct fraudulent transactions or open new accounts in the victim’s name.
  • Online Payment Fraud: A form of online transaction fraud specifically targeting payment systems like digital wallets. Can also include hacking into payment platforms or exploiting vulnerabilities in online payment processes to conduct fraudulent transactions.
  • Phishing Scams: Fraudsters deceive individuals through fraudulent emails, messages, or websites designed to trick them into revealing sensitive information such as passwords, account numbers, or login credentials. This information is then used to conduct fraudulent transactions.
  • Check Fraud: Manipulating or counterfeiting checks, or conducting unauthorized wire transfers to divert funds from legitimate accounts or deceive individuals into providing funds for nonexistent goods or services.
  • Wire Fraud: Financial fraud committed using electronic communications. Includes fraud committed with wire transfers, online services, social media, mobile devices, or other electronic means.
  • Zelle fraud: Scams using social engineering tactics to trick Zelle users into sending or receiving money as part of a fraud scheme. Can involve stealing user funds or tricking users into being money mules.
  • E-commerce Fraud: Fraudulent activities in online shopping, such as making purchases with stolen credit card information, using fake identities, or manipulating the payment process to obtain goods without paying.
  • Account Takeovers: Unauthorized access and control of someone’s financial accounts, either through hacking, social engineering, or other means, to conduct fraudulent transactions or drain funds.
  • Online Auction Fraud: Misrepresentation or non-delivery of goods or services in online auction platforms, where individuals make payments but do not receive the promised items or receive counterfeit products.

Why is transaction fraud happening so much?

There are more new types of financial transactions today than ever before. Many of those transactions take place either online or through connected devices, making them more susceptible to fraud.

Transaction fraud has exploded as fraudsters have devised sophisticated scams and shared them online. It’s not difficult to conduct a simple online search and find the most popular schemes. Running them individually is possible, but leaves fraudsters open to being caught if they aren’t careful. That’s where crime rings come in to protect the group and use even more sophisticated methods to cover their tracks and commit transaction fraud at large scales.

Advancements in AI also play a role in increased transaction fraud. Fraudsters can use bots to commit scams across the world online in seconds. Machine learning algorithms can learn how fraud detection systems work, then bypass them. When combined with easy access to low-cost labor, these scams can be run cheaply and efficiently to do maximum damage.

How to detect transaction fraud

For institutions, detecting transaction fraud means having the right monitoring systems in place. This includes transaction monitoring systems that use predefined rules to identify fraud patterns. Unusual transaction amounts, frequencies, or customer behavior trigger alerts for investigation.

Address and identity verification as well as geolocation help prove a transaction was legitimate by flagging transactions from one part of the world that originate from a far different place. Many merchants will verify identity as well before approving transactions to ensure the person is who they say they are.

How AI prevents transaction fraud

Artificial Intelligence (AI) is crucial for fraud teams to detect and prevent fraud transactions.

It begins with analyzing huge datasets to find transaction information such as amounts, channels, billing and shipping addresses, payment methods, and more. Machine learning models can use this, combined with device information, merchant information, and other important events to create a holistic picture of a transaction. AI can detect anomalies in these datasets in real-time and either alert investigators or address the potential fraud itself.

AI takes a 360-degree view of a transaction so it can detect fraud on any side of a transaction. This is vitally important as attack vectors like real-time payment fraud have led to a rise in first-party fraud.

Tools like Device ID are equipped to detect attacks coming from mobile devices by fingerprinting the fraudsters based on their previous activity. Through the power of unsupervised machine learning, it detects manipulations and delivers highly accurate fraud scores to empower organizations to spot and prevent fraud attacks.

Learn how DataVisor’s platform detects and prevents transaction fraud with best-in-class capabilities and response time or book a time for a personalized demo with our team.