The European Union’s Battle Against Financial Fraud: Confronting the Threats Ahead

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Financial fraud remains a significant threat to the stability and integrity of the European financial system, particularly as digital transactions and cross-border payments grow in both speed, volume and complexity.¹ The European Banking Authority (EBA) and the European Central Bank (ECB) have taken active roles in assessing and addressing this issue. Their 2024 report on payment fraud highlights several key fraud typologies and emerging threats across various payment methods, with data revealing total fraud losses in the European Union (EU) of 4.3 billion euros ($4.64 billion) in 2022 and 2 billion euros ($2.15 billion) in the first six months of 2023.²

As fraud continues to evolve in both sophistication and reach, regulatory authorities are stepping up efforts to enhance security, particularly across cross-border transactions, and are working to enforce stronger customer authentication measures.

Prevalent Fraud Schemes in the EU

The 2024 report from the EBA and the ECB provides a detailed look into the primary vehicles used for fraudulent activities.³ These include card payments, e-money transfers, credit transfers, direct debits and cash withdrawals. Fraudsters have continued to adapt their methods, with each payment type offering different opportunities for exploitation.

Card payments: Card payment fraud remains one of the most prominent areas of concern. Fraudsters predominantly target remote transactions—those where the cardholder is not physically present during the purchase. According to the report, an alarming 82% of card payment fraud arises from these remote channels, such as online purchases, where the absence of physical verification creates an environment ripe for exploitation.⁴ Although advances in payment technology have improved security, the widespread use of cards in e-commerce continues to pose significant challenges.
E-money transfers: The rise of digital wallets, prepaid cards and other forms of e-money has brought convenience to consumers, but it has also introduced new vulnerabilities. Fraud in e-money transfers has surpassed that in card payments, with cross-border transactions playing a major role in the increased fraud rate. The lack of harmonized regulations across jurisdictions provides opportunities for criminals to exploit regulatory gaps, particularly in cross-border payments. E-money services that operate in multiple countries must navigate different rules on fraud prevention, making these services a key target for criminals.
Credit transfers: Credit transfer fraud, also known as authorized push payment (APP) fraud, is less frequent than card or e-money fraud and is characterized by its complexity. Fraudsters often deceive victims into initiating transfers themselves, using tactics such as phishing, impersonation and business email compromise. According to the report, 57% of credit transfer fraud involves some form of victim manipulation. These frauds are often harder to detect because they exploit trust rather than technological vulnerabilities.
Direct debits: Direct debit fraud typically involves unauthorized or falsified mandates, allowing criminals to withdraw funds from victims’ accounts over a period of time. Though this form of fraud accounts for a smaller percentage of total fraud losses, its recurring nature can cause significant financial harm before it is detected.
Cash withdrawals: Despite the increasing shift to digital payments, cash withdrawal fraud still presents a threat, particularly with stolen or cloned cards. Criminals exploit weak authentication processes or physical card theft to access funds via ATMs, often using skimming devices to steal card details.

Cross-Border Fraud: A Growing Challenge

One of the most pressing issues highlighted in the EBA and ECB’s report is the prevalence of cross-border fraud. As digital payments expand globally, fraudsters have increasingly turned their attention to international transactions, exploiting gaps in regulatory oversight and varying security standards. Cross-border transactions—especially those involving non-European economic area (EEA) countries—account for a large proportion of total fraud volume.

The data indicates that 71% of the total value of card fraud and 68% of fraudulent card transactions occur in cross-border payments. For credit transfers, 43% of the fraudulent value and 36% of fraudulent transactions are linked to cross-border activity. Notably, 28% of fraudulent transactions originate from payments made outside the EEA, highlighting the vulnerabilities that arise when payments cross borders, particularly in regions with weaker fraud prevention and anti-money laundering know-your-customer frameworks.

Fraud Mechanisms: How Fraudsters Operate

The methods used by fraudsters vary across the different payment types, but all share a common goal: exploiting vulnerabilities in the system to access funds. Understanding these mechanisms is critical to devising effective countermeasures.

For card payments, e-money transfers and cash withdrawals, fraudsters typically gain access to a customer’s payment information through data breaches, phishing schemes or malware. Once they have access, they initiate fraudulent payment orders or transfer funds to accounts under their control. In the case of card theft or cloning, criminals can use stolen details to make fraudulent purchases or withdraw cash, often before the victim is even aware that their card has been compromised.

Credit transfer fraud, by contrast, often relies on social engineering. Fraudsters manipulate victims into believing they are making legitimate payments, either by impersonating trusted figures (such as financial institutions [FIs], business partners or family members) or by convincing the victim that their accounts are compromised and require immediate action. This type of fraud is particularly dangerous because it is difficult to detect, often relying on the victim’s trust in the fraudster.

Regulatory Response and Mitigation Strategies

In response to these growing threats, European regulators have introduced a range of measures aimed at reducing fraud, particularly in the form of the Payment Services Directive 2 (PSD2). One of the key components of PSD2 is the requirement for Strong Customer Authentication (SCA), which mandates that payment service providers verify the identity of users through multiple factors before completing transactions.

SCA operates on the principle of multifactor authentication, requiring at least two of three elements: knowledge (something the user knows), possession (something the user has) and inherence (something the user is). By requiring users to provide multiple forms of verification, SCA makes it significantly more difficult for fraudsters to complete fraudulent transactions, particularly in online and remote payment environments where the risk of fraud is highest.

SCA must be applied in several scenarios, including when a user accesses their payment account online, initiates an electronic payment or performs actions that may pose a fraud risk. This multilayered approach has proven effective in reducing fraud rates, especially in cross-border transactions where authentication protocols were previously weaker.

Addressing Cross-Border Payment Vulnerabilities

Cross-border fraud presents a unique challenge, as many non-EEA countries lack robust fraud prevention standards, and not all regions have adopted SCA requirements. This creates an entry point for fraudsters to target European customers and institutions through cross-border transactions. The EBA and ECB’s report notes that fraud rates are significantly higher in countries without SCA, underscoring the importance of international cooperation in fraud prevention.

To combat this, the EU has been working to promote the adoption of SCA and other fraud mitigation technologies, such as confirmation of payee (also known as verification of payee, international bank account number check or name check) in global financial networks. Efforts include collaboration with regulators and FIs outside the EU to encourage the use of best practices and improve information sharing on emerging fraud threats.

The Role of Technology in Fraud Mitigation

While traditional methods of fraud prevention have focused on securing individual payment channels, modern strategies increasingly rely on technology to monitor and detect suspicious activity across multiple platforms in real time. Artificial intelligence (AI) and advanced machine learning algorithms have become increasingly useful—and are playing a growing role—in detecting fraud and other suspicious activity, because they continuously learn and adapt to emerging fraud tactics and can detect even subtle deviations from typical behavior.

These systems can operate with high precision, although accuracy depends on factors like data quality, algorithm sophistication and human oversight. A typical use is to flag potentially fraudulent transactions for further review before they are completed. For example, if a customer’s spending pattern suddenly shifts—like a sudden high-value international purchase or multiple small charges in a short period—AI can flag the transactions for manual review. Use of AI also can significantly reduce false positives compared to rule-based systems alone.

Challenges do remain, such as evolving criminal tactics, and the need for contextual understanding that AI may lack without human intervention. Continuous refinement and a human-in-the-loop approach are essential to maintain and improve detection accuracy.

AI/machine learning systems can identify patterns of behavior that suggest fraud. Moreover, AI combined with natural language processing (NLP) capabilities can monitor customer communications (e.g., emails, texts, chat logs) for signs of phishing attempts, account takeovers or impersonation fraud. By identifying suspicious language patterns or specific keywords associated with scams, NLP algorithms can flag potentially fraudulent interactions for further investigation. For example, if a customer service chatbot detects a suspicious request to reset login credentials, it can alert fraud teams or initiate additional security checks before granting access.

The use of AI is particularly effective in detecting cross-border fraud, where the complexity of international transactions requires more sophisticated monitoring tools. AI systems can analyze large volumes of data from multiple jurisdictions, identifying anomalies that would be difficult for human analysts to detect manually.

In addition, biometric authentication technologies, such as fingerprint and facial recognition, are being adopted to improve the security of remote transactions. These technologies offer an added layer of protection, reducing the likelihood of fraudsters successfully impersonating legitimate users.

Biometric authentication is a powerful tool in combating financial fraud because it leverages unique physical or behavioral characteristics that are difficult to replicate. Unlike traditional passwords or PINs, which can be guessed or stolen, biometric data is inherently personal and far less susceptible to common hacking methods. Furthermore, advancements in biometric technology have allowed for seamless and secure multifactor authentication, particularly in mobile banking, where a user’s identity can be confirmed with a simple fingerprint or face scan. This has significantly reduced incidents of identity theft and unauthorized access, as fraudsters are unable to bypass this form of authentication without physical access to the account holder’s biometric information.

It should be noted that when AI is used to prevent fraud, privacy concerns can arise due to the collection and processing of vast amounts of personal data, including sensitive financial or behavioral information. AI systems also rely on data from multiple sources, which can lead to risks of data breaches, unauthorized access or misuse of personal information. In addition, users may not always be aware of how their data is collected, shared or analyzed, raising concerns about transparency and consent. The technology’s reliance on historical data can also perpetuate biases, inadvertently targeting certain demographics more heavily. Striking a balance between fraud prevention and respecting privacy requires robust data governance, adherence to privacy laws, and implementing safeguards like privacy enhancing technology, data anonymization and data minimization.

Conclusion

The EU faces significant challenges in tackling payment fraud, particularly with the rise of instant payments and cross-border transactions and the increasing sophistication of fraud schemes. PSD2 and SCA provided a robust framework for reducing fraud rates, primarily online and remote transactions. However, as financial fraud continues to evolve, ongoing efforts to improve cross-border payment security, strengthen international cooperation and harness technological advancements will be essential in mitigating future risks.

In this regard, the upcoming Payment Services Directive (PSD3) is set to tackle key fraud-related shortcomings of PSD2, aiming to better protect consumers and enhance security across digital payment services. SCA requirements have proven inadequate in addressing sophisticated fraud tactics and emerging threats. PSD3 will build on PSD2 by refining SCA, streamlining real-time fraud monitoring and enabling more comprehensive data sharing between FIs. It will also impose stricter rules on fraud liability, ensuring that payment service providers bear greater responsibility for unauthorized transactions, thus encouraging them to invest in better security and anti-fraud technologies. By fostering greater transparency and strengthening reporting requirements for incidents, PSD3 aims to create a more cohesive and resilient framework to protect consumers against the evolving landscape of payment fraud.

In sum, by building on the current regulatory framework, using modern technology and adapting to new threats, the EU and the FIs that operate within it can help ensure the stability and trust of its financial system.

Samar Pratt, Global Financial Crime Compliance Advisory leader, Capgemini,