Understanding the Bust-Out Scheme
A bust-out scheme is like a con artist’s playbook for credit cards. The scam begins when a fraudster gets their hands on a fake identity and applies for a credit card. For months, sometimes even years, this wolf in sheep’s clothing masquerades as the perfect customer. They make regular purchases—grocery, petrol, the occasional dinner out. Bills are paid promptly, every single month.
This charade helps them build an excellent credit history, winning over the trust of the credit card company and even earning credit limit increases. Once they’ve established themselves as a reliable customer, they can pull off the ultimate heist—maxing out their credit limit and disappearing without a trace!
Why Bust-Out Fraud is Hard to Detect
As fraudsters mimic normal customer behaviour for a long period of time, bust-out fraud is difficult to detect. Fortunately, financial institutions have clever strategies to detect potential credit card scams.
Banks now cross-check details against social media and public databases for missing or inconsistent personal information on applications, which can be an early red flag.
Another strategy is to check an individual’s credit card portfolio. While the average person typically holds about three or four credit cards, someone with an unusually high number—say, ten or more—immediately raises immediate suspicion.
Financial institutions also monitor behavioural patterns. Frequent requests for higher credit limits and sudden and significant changes in spending habits over a short period often signal that something is not right prompting fraud detection teams to investigate further.
By using advanced technology to monitor these red flags, banks can effectively prevent fraud and protect consumers’ finances.
The Ripple Effect on the Payment Industry
Bust-out fraud schemes can greatly disrupt the broader payment ecosystem. Recent studies from Alloy’s 2024 State of Fraud Benchmark Report show that fraud has become a serious issue in the UK, and 15% of fraud cases involve bust-out schemes. It is recognised as one of the most common forms of fraud affecting financial institutions and merchants. Here are some of the impacts:
Delayed Detection and Hidden Losses
When a bust-out fraud occurs, the initial response of many financial institutions is to write off the loss as bad debt. This is a standard procedure for accounts that have defaulted or become delinquent.
The true nature of the fraud often remains hidden for months, sometimes even years, after the incident. It’s usually only when financial institutions conduct deeper investigations into the identity and behaviour of the cardholder that the full scope of the bust-out scam comes to light.
Financial Strain on Merchants and Banks
The sudden influx of fraudulent claims can overwhelm a merchant’s or acquirer’s operational processes. Additional resources are often required to handle the increased queries.
Issuers may absorb some of these costs, but the sad truth is that most of this burden will trickle down to merchants. Adding insult to injury, cardholders who fall victim to the scam will often file chargebacks to recover their loss. Substantial chargeback fees would make the merchant’s operational cost even greater.
Combatting Bust-Out Fraud
By understanding the challenge of delayed detection, banks and credit card companies can better prepare themselves to combat this form of fraud. Implementing strategies that focus on early warning signs and comprehensive identity verification is key.
All players in the payment industry need to adopt strong fraud detection tools, perform comprehensive merchant due diligence, and keep a close eye on suspicious transaction patterns.
Equally important is fostering collaboration between merchants, acquirers, and issuers, as working together can help spot and stop bust-out schemes before they escalate.