What is Bank Fraud?A Big, Bad White-Collar Crime
What is Bank Fraud? Definitions & Overview
Watch any Wild West-themed movie, and there’s a decent chance you’ll catch a scene where the villain commits a bank robbery.
Today’s banks largely custody their depositors’ assets electronically, so the gunpoint heists you see in old-timey flicks are largely a relic of yesteryear.
But that’s not to say that bank robberies have disappeared — far from it. Instead, bank fraud has simply transitioned online. In this article, we take a closer look at what bank fraud is and why merchants should care.
Bank Fraud
It’s easy to understand why fraudsters often target financial institutions. After all, banks are where money is deposited, stored, and withdrawn. What’s less well-understood, though, is how bank fraud occurs, and how often it happens.
What is Bank Fraud?
- Bank Fraud
Bank fraud occurs when scammers use deceitful means to obtain money or assets held by a financial institution.
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Essentially, bank fraud is about the manipulation of trust and the exploitation of vulnerabilities within the financial system. It’s a pretty broad term; unlike other schemes we’ve talked about on the blog before, bank fraud is less of a tactic, and more of an umbrella term. As we’ll see later, it can be carried out using lots of different tactics.
Bank fraud is a big problem, too. Research from LexisNexis Risk Solutions shows that every $1 lost to bank fraud ultimately costs financial institutions $4.41 before the issue is resolved.
How Bank Fraud Impacts Merchants
Despite its name, the impact of bank fraud extends well beyond financial institutions themselves. Take merchants, for instance.
Merchants are uniquely vulnerable to bank fraud because they sit at the intersection of payments and customer interaction, which creates multiple points of exposure to fraud. Every transaction, every customer account, and every integration with a payment processor is a potential attack vector for a fraudster.
Compounding the issue for sellers is the direct relationship between bank fraud and chargebacks. Specifically, a successful bank fraud attempt, like an account takeover (ATO), often culminates in unauthorized transactions.
When the legitimate account holder discovers these transactions, they dispute them, leading to chargebacks. For merchants, this spells lost revenue, lost inventory, and chargeback fees, the latter of which can range from $20 to $100 per dispute.
How Bank Fraud Happens, Step-by-Step
There are numerous tactics that scammers can use to conduct bank fraud attacks. We’ll get into this in more detail in the next chapter.
That said, a typical fraud scheme can play out over a period ranging from a few hours to several weeks, depending on the sophistication of the attack and the security measures in place. No matter the timeline or how complex a bank fraud attempt is, though, it can often be broken into a three-step process that involves:
#1 | Gathering
The first step is reconnaissance. Fraudsters gather information about their target using a variety of deceptive means. For example, they may send phishing emails designed to trick employees into revealing sensitive data, use pressure or urgency to manipulate your customer service staff over the phone, or simply buy information leaked in data breaches from illegal vendors on the dark web.
#2 | Access
Once they have the necessary information, fraudsters will attempt to gain access to your merchant account or business bank account. When they do, they’ll try to stay undercover by making small, seemingly innocuous changes or transactions. This could be a small purchase, a password reset request, or a change to a shipping address. This “testing” phase allows them to verify that their access works and that they haven’t been detected before they move on to the main event.
#3 | Execution
With their access confirmed, the fraudsters strike. They move quickly to extract as much value as possible before they are discovered. This often involves a network of money mules; individuals who wittingly or unwittingly help launder the stolen funds by receiving them in their own accounts and then transferring them elsewhere. This allows the bank fraudsters to cover their tracks and makes the money harder to trace.
