Third-party fraud refers to any situation in which someone commits a crime by assuming a false identity and impersonating another individual or organization. This is done without their knowledge or consent of the targeted individual.

Cybercriminals acquire personal information from one or multiple cardholders. They subsequently gain control over existing accounts, or establish new ones without the victim’s awareness. These accounts frequently pertain to credit cards and serve as a means to make unauthorized purchases

A criminal might use stolen personal information to open a bank account, for example. They might also try to apply for a credit card, or make unauthorized purchases in the victim’s name. The victim is typically unaware of these activities until they discover the fraud sometime later.

Third-party fraud is frequently employed to facilitate fraudulent credit card transactions, although it extends well beyond this. For instance, criminals have been known to use fake checks or accounts, apply for substantial loans or mortgages, or use counterfeit identities to defraud multiple victims at once.

Common Types of Third-Party Fraud

Each type of fraud (first-, second-, or third-party fraud) poses unique challenges for detection and prevention. Financial institutions employ various security measures to combat them.

Tactics can vary significantly depending on the circumstances. That said, here are some of the most common types of third-party fraud. They demonstrate the diverse methods and strategies employed by fraudsters to exploit individuals and financial institutions for their own gain:

Identity Theft

A criminal steals an individual’s personal information, such as Social Security number, bank account details, or credit card information, and uses it to impersonate the victim. They can then open new accounts, apply for loans, or make unauthorized purchases in that person’s name, leaving the victim to deal with the financial and emotional consequences.

Account Takeover

In an account takeover, a fraudster gains access to an individual’s existing financial accounts, such as bank accounts, email accounts, or social media profiles, without their consent. They often accomplish this by obtaining the victim’s login credentials through phishing emails, malware, or other fraudulent means. Once inside the account, the fraudster may withdraw funds, change account information, or use it to perpetrate further fraud.

Check Fraud

In check fraud, fraudsters create counterfeit or altered checks using someone else’s bank account information, forging signatures, or manipulating the check’s details. They then attempt to cash these fraudulent checks, either by depositing them into their own accounts or presenting them for payment. The victim’s bank account is debited, and they may face potential legal issues as a result.

Synthetic Identity Fraud

Synthetic identity fraud is a sophisticated form of third-party fraud where criminals create entirely fictional identities by combining real and fabricated personal information. These synthetic identities are then used to open fraudulent accounts and obtain credit or loans. Synthetic identity fraud is challenging to detect because the criminal uses a combination of real and fake data, making it difficult for financial institutions to spot the deception.

Loan Stacking

The fraudster applies for a number of different loans using a false identity, but has no intention of repaying any of them. The scammer can simply pocket the funds and disappear. Meanwhile, the debt it forced onto the person whose Social Security information was used to secure the loan.

New Account Fraud

A new account is opened using fake or stolen credentials. For example, a new line of credit. The scammer may then max out and abandon the account. In other cases, the scammer may leverage the new account — and the credit history it establishes — to obtain other, higher-value accounts.

What Banks Can Do

It’s important to note that consumers aren’t the only victims of third-party fraud. Banks and merchants are also frequently targeted by third-party scams.

To combat third-party fraud effectively, banks should take several proactive measures to protect both their customers and their own financial systems. Here are a few strategies and actions that banks can implement now to protect themselves and their clients:

Advanced Fraud Detection Software

Banks should invest in state-of-the-art fraud detection software and analytics tools. These systems can monitor customer transactions in real time, looking for unusual patterns, high-risk activities, or red flags that may indicate fraudulent behavior. Machine learning algorithms can analyze vast amounts of data to identify anomalies, enabling banks to detect third-party fraud attempts promptly.

Multi-Factor Authentication (MFA)

Implementing MFA for customer authentication can significantly enhance security. This means requiring multiple forms of verification, such as something the customer knows (password), something they have (a mobile device), or something they are (biometrics like fingerprints or facial recognition).

Transaction Monitoring

Banks should actively monitor transactions for unusual or suspicious activities. If a transaction seems out of the ordinary for a particular customer, the bank can flag it for further investigation or verification. This can help prevent unauthorized transfers or purchases, especially in the case of account takeovers.

Customer Education

Banks can play a crucial role in educating their customers about the risks of third-party fraud and providing guidance on how to protect themselves. This education can include tips on recognizing phishing emails, securing personal information, and regularly monitoring account statements for unauthorized activity. Educating customers can empower them to be more vigilant.

Merchant Collaboration

Banks can collaborate with merchants by sharing information about common fraud schemes and providing guidance on how to identify and prevent fraud attacks. This partnership can help reduce the incidence of third-party fraud as merchants become better equipped to spot suspicious transactions and take appropriate action.

Reporting & Response

Banks should establish clear reporting mechanisms for customers to report suspected fraud promptly. They should also have a robust response plan in place to investigate and address reported cases of third-party fraud swiftly. Timely responses can help mitigate the impact on affected customers and prevent further losses.

At the end of the day, the fight against fraud is a collaborative effort across every industry and vertical. Banks can and should continue to lead the charge by continuously investing in technology and innovations that proactively scan for risk in real-time. Beyond this, working with clients and customers to continuously improve the authentication process is equally as valuable against every type of fraud out there.