The current situation of self-fraud in payment transactions in Latin America and strategies to convert it
Season 5 Episode 10
Transcript
Juan José Ríos (Host): In an environment where technological advances facilitate transactions, new opportunities for fraud also arise. Self-fraud, also known as first-person fraud, has become an alarming growing trend within financial institutions in Latin America.
My name is Juan José Ríos, and I welcome you to a new episode of Mundo Financiero Seguro, the podcast from Plus Technologies & Innovations.
Today we will address an issue that is becoming increasingly relevant in the financial world: self-fraud.
We will explore the current situation of this modality, the challenges it presents, and, above all, the most effective strategies to combat it.
Joining us are:
- Carlos Ángulo, fraud prevention expert with nearly 45 years of experience in the financial sector, including payment methods and digital banking. From Peru.
- Héctor Morales, Product Manager for Payment Methods and Transaction Security at Plus TI.
Welcome, Carlos and Héctor.
Juan José Ríos: Before we get into strategies, let's define the concept. Self-fraud occurs when a legitimate customer makes a transaction and then claims that they did not authorize it, with the aim of obtaining a refund.
This type of fraud has grown considerably in Latin America, driven by the widespread adoption of digital payment methods and the ease of filing disputes.
Carlos, based on your experience working with financial institutions, how does this phenomenon manifest itself in the region and how serious is its impact?
Carlos Ángulo: Self-fraud can take the form of first-person fraud and also "second-person" fraud, i.e., when someone close to the account holder carries out the transaction.
We traditionally associate it with unrecognized transactions, but it also occurs in credit origination. Intentionality is key: there are intentional cases and unintentional ones.
In the United States, a study by the company Socure revealed that 35% of respondents admitted to having participated in auto fraud. Among the main reasons:
- 8%: unrecognized merchandise (has a greater impact on businesses).
- 7%: transactions claimed as fraud.
- 7%: fraud in credit origination.
By age group, 49% of millennials (30–45 years old) admitted to having committed self-fraud. In Generation Z, up to 52% said they would do so if they weren't caught.
Furthermore, a person who has had two accounts closed due to self-fraud is 189 times more likely to reoffend.
In Peru, banks report that approximately 7% of unrecognized transactions correspond to self-fraud. The actual percentage is likely to be higher, as exhaustive analysis is not always carried out.
Juan José Ríos:
Carlos, how would you classify this fraud, and what factors have driven its growth?
Carlos Ángulo:
We can divide it into:
- Unintentional
- The customer does not recognize the name of the store.
- Consumption by family members (e.g., children playing digital games).
- Intentional
- People who take advantage of circumstances to complain.
- "Professional" cases with structured patterns.
- Groups organized with similar characteristics in terms of claims, contacts, addresses, or receiving accounts.
Common features:
- More than two or three claims in 12 months.
- Less than one year of service with the institution.
- Beneficiaries with personal ties.
- Recent purchase of insurance prior to the incident.
- Absence of attempts after the alleged fraud.
Growth can also be explained by:
- Accelerated digitization post-COVID-19.
- New channels without sufficient traceability.
- Regulations heavily geared toward customer protection, such as Law 21.234 in Chile, which requires quick returns and complicates the investigation.
Juan José Ríos: Héctor, what impact has it had in Latin America?
Héctor Morales: The growth is alarming. In the region, between 15% and 30% of claims may correspond to auto fraud, depending on the country.
Influencing factors:
- Level of digitization and banking penetration.
- Local legislation.
- Authentication methods used.
Some regulations require returns within 48 hours, which may encourage abuse.
Behaviors such as risky investments, purchasing cryptocurrencies, or gambling also have an influence. If the customer loses money, they may be tempted to disown the transaction.
Carlos Ángulo:
- Define a risk appetite that includes self-fraud.
- Strengthen the role of the contact center in detecting intent.
- Implement policies for terminating repeat offenders.
- Customer education, especially in unintentional cases.
- Create specific databases on auto fraud.
- Develop first-person-oriented risk and monitoring models.
- Generate two-way alerts to confirm transactions.
Juan José Ríos: Héctor , what role do artificial intelligence and machine learning play?
Héctor Morales: Advanced machine learning , especially deep neural networks and decision trees, allows detection levels of between 90% and 95% to be achieved in payment methods.
However, the key is data quality:
- Complete transaction history.
- Information on previous disputes.
- Type of business.
- Customer behavior.
In addition to machine learning, rule-based models should be used to react quickly to new patterns.
And something fundamental: provide accurate feedback to the systems, indicating which cases were confirmed as self-fraud.
Carlos Ángulo:
- Customer education.
- Specific transactional analysis.
- Dedicated databases.
- Ad hoc models and monitoring.
- Termination policies.
- Sharing information within the ecosystem.
- Use of compelling evidence in disputes.
Héctor Morales:
- Be familiar with local legislation.
- Collaboration between issuers and merchants.
- Strengthen robust authentication.
- Rigorous dispute resolution procedures.
- Prosecute proven cases and publicize consequences.
Juan José Ríos: When institutions lack the right tools to detect first-person fraud, they may implement ineffective measures that affect legitimate customers and damage their reputation.
It has been an enriching conversation. Thank you to Carlos Angulo from Peru and Héctor Morales for sharing their experiences.
Auto fraud will continue to evolve, and it is essential that financial institutions be prepared.
Thank you for joining us on this episode of Mundo Financiero Seguro, the podcast from Plus Technologies & Innovations.
I'm Juan José Ríos.
Until next time.
