Fraud is getting more complicated and more emotional. This is what we’ve found over the past nine months as the cost of living crisis squeezes more families and businesses into a corner. The act of ordinary people trying to get something for free – for example by avoiding BNPL repayments, raising false complaints or demanding a chargeback from the bank – is known as “friendly fraud”, and it’s on the rise.
Friendly fraud reaches new heights
Friendly fraud was already an issue when I wrote my initial predictions at the beginning of the year. As of December 2022, over one third of merchants had already noticed a “significant spike”, according to a Merchant Risk Council report. The report goes on to reveal that friendly fraud is the second most common attack after phishing. Today, sadly, it’s even more prevalent. 75% of merchants agree that it’s higher in 2023 than it was in 2022, according to one study published in June. This represents a 19% increase since 2021. Around seven in ten merchants are either moderately or extremely concerned about this trend.
It's little wonder why. Rather than talking about an issue with the merchant, requesting a different product or a discount, 52.5% of customers will go straight to their bank to demand the money back. Merchants estimate that 44% of all chargebacks – money they must refund – comes from friendly fraud. It’s causing pain for small businesses, who – in turn – may feel desperate and start committing friendly fraud against suppliers themselves.
Family fraud is likely to increase
There’s another side of friendly fraud too. And that is the painful emotional and unreported aspect. In difficult economic times, there is generally an increase in fraud committed within families. For example, by taking out a credit card in someone else’s name, or stealing business credentials to take out a loan. Around the time of the 2008 financial crisis, an estimated 70% of financial abuse against the elderly came from their own family members. And about two-thirds of the time, it was within their own homes.
Sometimes the family fraud victim may be aware, or even implicit in the crime. Other times, it may come as an upsetting shock. This type of friendly fraud is often left unreported, as the family member does not want to drag a loved one into criminal proceedings. As the difficult economic downturn continues to bite, this problem is likely to worsen.
Some sectors are particularly vulnerable
At the time of writing, there is not much research available to indicate whether businesses are avoiding payments owed to suppliers. However, anecdotally, we’ve seen some turbulence within the construction and food and beverages industries. These are some of the worst-hit sectors economically. 30% of Brits are cutting back on how much they eat in restaurants, and in June, the construction sector shrank significantly, with the PMI index falling below 50.
The post-pandemic downturn and energy price crisis are largely to blame for this volatility. Even with access to payment terms, they cannot maintain a steady cash flow in this difficult economic climate. The COVID support for business – like CIBILs and Bounce Back Loans – have also come to an end, further exacerbating the situation. Between the rising cost of materials, high energy bills, shrinking consumer budgets, rocketing inflation, debilitating interest and ending of government support, certain businesses are turning to desperate actions.
When the economy goes down, fraud goes up. Fortunately for our clients, we absorb the risk and cover the cost in these cases.
Scammers are increasingly using AI
Over the past nine months, we’ve also seen scammers starting to use generative AI programs like ChatGPT. This is worrying because they can now create professional-looking emails with more convincing content quickly. It will become harder for customers to differentiate between real and fake businesses, or for employees to recognise a scam from an instruction from their boss. To make matters worse, AI also makes scamming cheaper and more efficient.
Another way that scammers use AI is by impersonating managers, employees or family members with deepfakes. In March, the US Federal Trade Commission issued a warning about voice-cloning AI scams. With just 30 seconds of audio – for example, from a social media post, podcast interview or TikTok video – fraudsters can clone someone’s voice and make convincing calls demanding money. Worryingly, the deepfakes are even fooling voice authentication software security with a 99% success rate.
Humans and technology still need to work side by side
In my predictions earlier this year, I stressed the importance of technology and people working together. An over-reliance on technology will lead to glaring weak spots just as much as an over-reliance on manual processes. Challenger Bank Revolut discovered this to their detriment in March, when it emerged that a bug in the system had been exploited by scammers, losing $20 million. Digital transformation is not an overnight process and governments have been slow to react to this kind of fraud. Skilled employees need to be especially on the alert.
At Hokodo, we use a blend of human and machine expertise to detect and reduce fraudulent attacks. For example, with our ID verification controls. We don’t just rely on technology, we do randomised manual checks too. This is one of many examples of how all different types of intelligence are needed to overcome fraud.
No matter how many years into the future we look, I am confident that this will always be the case. The strongest barriers to fraud are humans and technology, working side by side.
Missed our 2023 predictions? Check them out here.