The results of a recent survey should serve as a wake-up call for plan sponsors, providers and related financial institutions about how they prevent, detect and resolve identify fraud.
During the next 12 months, criminals will strike at the heart of the financial services industry and negatively affect consumers, according to Javelin Strategy & Research’s 2020 Identity Fraud Report, which suggests that financial institutions’ methods to identify and respond to fraud are no match for criminals’ high-tech schemes to hijack consumer accounts. And based on several recent court cases, 401(k) plans have become prime targets, including one where the third-party administrator and plan custodian countersued the plan sponsor for contribution and indemnity claims in regard to an alleged cybersecurity breach.
The report found that fraud losses grew 15% in 2019 to nearly $17 billion—even as instances of fraud fell from 14.4 million in 2018 to 13 million in 2019, which resulted in consumers facing $3.5 billion in out-of-pocket costs.
Areas of concern range from fraudulent account openings (synthetic identities), peer-to-peer (P2P) payments and full takeover of all accounts, not just checking or cards but also investment accounts and other high-dollar balances, the report notes. What’s more, the report emphasizes that, at a time when consumers are feeling financial stress from the COVID-19 crisis, account takeover fraud and scams will increase, as criminals become more active during times of economic hardships.
“These findings should be a wake-up call for financial institutions, the payments industry, businesses and consumers across America,” says Krista Tedder, Head of Fraud with Javelin Strategy & Research. “The data is proof of what we’ve long known—the full weight of identity fraud lies not only in counterfeit credit cards and magnetic stripes but in full account takeover and new account fraud.”
In fact, account takeover fraud is one of the hardest types of fraud to identify, according to the report. It found that account takeovers—where a criminal gains unauthorized access to an online account belonging to someone else—are trending at the highest loss rate, up 72% over the previous year. This is due in large part to technological advancements that have made it easier for criminals to manipulate and socially engineer information, while making it harder to detect account takeovers without additional security infrastructure. And criminals work quickly, with 40% of all fraudulent activity associated with an account takeover occurring within one day, the report notes.
The study also found that P2P fraud is increasing rapidly. Financial institutions have found that P2P systems, which allow one person to send payments to another person, have seen a 733% increase in fraud between 2016 and 2019.
To counter fraud and ensure data privacy, the report emphasizes that the “conversation needs to change” from monitoring activity that is occurring to securing the information before it is stolen.
“Because criminals are adapting to new technologies faster than consumers will adopt technology to reduce their risk, the financial services industry bears the burden of driving the changes, such as increasing usage of two-factor and biometric authentication and promoting tokenized digital wallets in order to reduce the crippling impact of fraud on the American public,” the report submits.
For consumers, the report recommends adopting a zero-trust contact policy, signing up for account alerts, where customers receive notifications of suspicious activity, using stronger passwords and updating new addresses and phone numbers with their financial institutions, as consumers often forget to do so. Consumers also should secure online and mobile devices by instituting a screen lock, encrypting data stored on the devices, avoiding public Wi-Fi and/or using a VPN, and installing anti-malware, the report advises.
The findings are based on a nationally representative online survey of 5,000 U.S. consumers conducted Oct. 22 through Nov. 4, 2019.
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