2 Types of Financial Bank Fraud Schemes To Avoid


Financial or banking fraud occurs when a hacker intentionally uses deceptive, unfair, misleading or false business practices to gain access to another individual’s bank accounts and steal money.

Fraud can be carried out either with the victim’s participation or without. For example, a victim might inadvertently open an email purporting to be from her bank, then click on a link in the email leading to a spoofed web page mimicking her actual bank’s web page. She enters her account credentials which are then collected and misused by the fraudster. 

Other fraud schemes are less obvious, whereby criminals install malware on victims’ computers to record keystrokes and steal passwords and other personally identifiable information of victims that might be saved in a browser or hard drive.

Fraud cost Americans a total of about $56 billion last year, with about 49 million consumers falling victim to this crime.

2 Types of Financial and Bank Fraud

There are dozens of fraud schemes aimed at tricking victims to gain access to their financial accounts. Though the levels of creativity and sophistication continue to grow, there are two broad categories that generally serve as the biggest concern for banks and financial institutions.


1. Traditional Identity Theft

The broadest “traditional” type of fraud is known as Identity theft. This includes many schemes like social security ID theft, account takeover fraud and credit or debit card fraud. Identity theft occurs when someone steals the personal information of another individual with or without that individual’s knowledge. This information can include a name, Social Security number, bank account number or credit card information. The fraudster then uses that information to assume the victim’s identity, gain access to the victim’s bank or credit card accounts, and steal funds.  

While criminals with access to a victim’s accounts might simply withdraw funds or run up charges on a credit card, some criminals will use the stolen credentials to open up new bank accounts and apply for new lines of credit or credit cards. 

Indeed, while victims might not notice fraudulent charges for a few hours — or worse, a few days — before calling the bank to report the criminal activity, banks can stop criminals from opening up new bank accounts with stolen credentials by having stronger onboarding and fraud detection systems in place.

In fact, with such systems in place, such as those offered by Instnt, fraud can be detected and reported to the victim first in order to stop further criminal activity.


 2. Synthetic Identity Theft

While in identity theft, as described above, a criminal steals the personal information or account credentials of a real person to commit financial crimes. This much pernicious fraud scheme has emerged in the last few years: synthetic identity theft.

In synthetic identity theft, a criminal combines real and fake information to create an entirely new, fictitious identity. The criminal then uses the new identity to open fraudulent bank and credit card accounts, which are then used to make withdrawals, purchases, or other transactions. 

A typical scenario of synthetic identity theft occurs when a criminal first fraudulently obtains a Social Security number, often of a child younger than 18 with no credit history. Criminals also consider individuals who are deceased or who are in prison—people who have not had any credit activity for several years. The criminal then uses the “inactive” Social Security number and creates a fake name to apply for credit. 

Initial applications may be denied, but the denial is still valuable: the fake identity is now legitimized in the credit reporting system associated with the stolen social security number. 

The criminal will continue to apply for credit until approval is reached, most likely from a smaller financial institution or an online retailer with less sophisticated controls in place. Once credit is granted — and payments are made — credit scores can increase, and additional credit can be easier to obtain.

Banks can halt this synthetic identity theft from taking place by having stronger onboarding systems in place, such as that offered by Instnt. While more traditional KYC or AML procedures will double-check to verify that the applicant has not previously been engaged in criminal activities, such as money laundering, synthetic identity theft can be stopped by other means. Systems can be put in place to verify names and addresses and understand any anomalies in past purchasing behaviors and credit decisions. 

Financial Institutions Continue To Be Challenged by Fraud

According to the Federal Reserve, synthetic identity theft is the fastest-growing financial crime, driven in part by the increase in the availability of credit and the ease consumers have with applying online. Auriemma Insights estimates the losses to banks due to synthetic identity fraud to be $6 billion annually

Financial institutions are challenged to spot this type of fraud. Whereas a consumer can detect unusual account behavior and quickly notify her financial institution, there is no single victim with identifiable financial losses to spark an inquiry because a non-existent individual will never report suspicious activity. 

Onboarding a new customer with a synthetic identity is difficult but not impossible. Though fraudsters might know how to game the system, an outsourced customer onboarding system with advanced machine learning and AI technologies in place — and used by several financial institutions at once — can spot fraudulent behavior by applying aggregated, acquired expertise. 

Banks can focus on providing superior products and excellent customer service without worrying about losses due to fraud or blocking account access to legitimate customers. 

Avoiding Financial Bank Fraud with Instnt

Instnt is the first fully managed digital customer onboarding service for businesses with up to $100MM annually in fraud loss insurance. With a codeless integration on websites or apps, Instnt can reduce rejection rates by 50% without friction or fraud, grow top-line revenue, and lower operational costs by 30%. 

See how our customer fraud prevention product works today!


About the Author

Instnt's fraud loss insurance platform offers comprehensive protection for businesses for the entire customer lifecycle, from account initiation, and onboarding to subsequent logins, transaction processing, and the broadened accessibility of additional products and services.