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P2P Fraud
Discover the rise of P2P fraud in digital payments and lending. Explore how these scams work, their impact, and ways to protect your business.
Discover the rise of P2P fraud in digital payments and lending. Explore how these scams work, their impact, and ways to protect your business.
P2P payments are gaining popularity worldwide. According to eMarketer, approximately 170 million people in the U.S. alone use these services, and this number is projected to grow:
At the same time, there is a noticeable increase in fraud associated with this type of money transfer.
Alloy Wealth reports that such crimes result in annual losses of $1.7 billion. Financial institutions also highlight that 8% of their clients encounter P2P fraud.
Before defining P2P fraud, it is essential to understand P2P payments. These are types of money transfers where funds are sent directly from the sender to the recipient.
Specialized electronic payment systems like Google Pay, PayPal, Zelle, and others facilitate these transfers.
With just a few clicks, users can complete transactions quickly and easily.
However, this very speed and simplicity play into the hands of fraudsters, who exploit P2P platforms to illegally access others' finances. This is what is referred to as P2P fraud.
Fraud in digital payment networks can affect various transactions, including P2P lending. This is a method of borrowing funds directly between individuals without involving traditional financial institutions like banks.
P2P loans can be requested from individual investors or lenders, who earn interest by providing the funds.
Here’s how it typically works:
1. The borrower submits a loan application on a P2P platform.
2. An investor or lender selects the deal they wish to fund.
3. The payment system acts as an intermediary between the borrower and the lender/investor, handling tasks such as signing the loan agreement, processing payments, and assessing creditworthiness.
Despite numerous advantages, including favorable terms and fast funding, this type of lending has a significant drawback — a high level of P2P fraud risk.
Fraud in P2P loans can take various forms, targeting both borrowers and lenders. Below are some of the most common schemes used by fraudsters.
One of the most prevalent fraud schemes in P2P lending involves synthetic identity fraud. Unscrupulous applicants may use stolen identification and provide information that combines real and fabricated details.
As a result, loans are issued to non-existent digital identities, and, naturally, repayments on such loans are never made.
Criminals may attempt to hijack a legitimate user's account through various types of cyberattacks.
Once access to a victim's account is obtained, fraudsters can use it to apply for loans and transfer the funds to accounts under their control.
This fraudulent scheme unfolds in multiple stages. Initially, the fraudster secures a loan and makes all payments to gain the lender’s trust. Once the credit limit is maximized, the fraudster withdraws all funds and disappears.
According to FICO, this type of fraud results in billions of dollars in losses, accounting for 10%–15% of "bad" loans that are never repaid.
In this scenario, fraudsters submit multiple loan applications simultaneously or within a short time frame.
This tactic makes it challenging for lenders to detect, often leading to approval of funding. Over time, the borrower’s credit burden becomes unsustainable, significantly increasing the likelihood of default.
Modern P2P platforms increasingly turn to alternative data providers to enhance borrower assessments. Incorporating such data into credit scoring offers a comprehensive view of an individual’s creditworthiness and mitigates risks for lenders.
One of the most informative sources of non-traditional data is the consumer's digital footprint. This includes users' online activities, data from mobile network operators, and internet service providers.
Here’s how digital footprints can aid in financial fraud prevention.
By analyzing the applicant’s email address, lenders can verify its authenticity, check for blacklists, and review the accounts registered under that email on social networks.
A phone number can reveal a lot about its owner. For instance, the use of virtual SIM cards or burner phones may signal an attempt to conceal true information, indicating potential fraud.
Additionally, phone numbers can be used to trace online registrations, spam activity, and more.
Analyzing the IP address from which a loan application is submitted can provide valuable insights. It helps verify the accuracy of the address stated in the application and allows the lender to pinpoint the applicant’s exact location.
Combating Fraud With Digital Footprint Analysis
Data-driven Decision Making in P2P Lending
Financial Fraud Prevention Using Digital Footprints