Social Engineering Scams Prove Costly to Consumers and Bank Bottom Lines

With financial institutions (FIs) fortifying their defenses and evolving their strategies against digital payment fraud, criminals are turning to a new weak spot: the customers themselves.

Gone are the days of clunky phishing emails riddled with typos. Today’s fraudsters are using advanced social engineering scams to target consumers directly, leveraging fear, urgency and even fake customer service lines to dupe unsuspecting victims into handing over sensitive information.

The latest PYMNTS Intelligence in “The State of Fraud and Financial Crime in the U.S.” reveals that social engineering fraud has increased by 56% in the past year. While FIs have made strides in curbing traditional digital payment fraud, the escalating sophistication of scams highlights critical gaps in their defenses.

Unlike traditional digital payment fraud — which saw a significant decline in its share of dollar losses, dropping by 57% in 2024 — social engineering scams exploit human psychology rather than technological loopholes. Fraudsters now rely on “customer-centric” tactics, leveraging trust to bypass the robust security systems FIs have built around digital payments.

This shift underscores the need for FIs to continuously adapt their fraud prevention strategies and prioritize customer education to mitigate the growing threat of social engineering scams.

Read more: Financial Scams Drive 122% Increase in Fraud Losses by US Banks

Fraudsters Target Consumers as Banks Beef Up Security

The decline in digital payment fraud is a testament to the effectiveness of advanced security measures, such as transaction alerts and device fingerprinting. Yet, combating social engineering scams requires a different approach.

A PYMNTS Intelligence report, “The Impact of Financial Scams on Consumers’ Finances and Banking Habits,” a collaboration with Featurespace, revealed that financial scams are widespread, affecting 3 in 10 U.S. consumers in the past five years. Scams damage consumer trust in FIs. Over half of victims consider switching FIs, and 30% actually do.

The sad reality is that the true incidence of scams is likely higher than what’s being reported, due to embarrassment and perceived futility of reporting. Sixty-five percent of victims blame themselves for falling victim to fraud.

But against that backdrop, the same PYMNTS Intelligence data shows that victims prioritize advanced fraud detection and monitoring technologies as the most important safeguards financial institutions can implement. Behavioral analytics — an emerging technology that analyzes patterns in user behavior to detect anomalies — has proven particularly adept at identifying scams that exploit human targets.

“[End-users] often don’t have a lot of time to look at a particular message. It becomes harder to understand of it’s a ‘real’ message or one that’s trying to deceive us,” David Excell, founder of Featurespace, told PYMNTS, highlighting the role that technology can play in preventing fraud before the bad actor can stick their foot in the front door.

However, a striking 83% of FIs cite budgetary constraints as a barrier to implementing new anti-fraud technologies or enhancing existing ones. While the cost of innovation remains a challenge, FIs must weigh these expenses against the financial and reputational risks of inaction.

Read more: Why the Customer Experience Should Drive Fraud Prevention Strategies

Winning the Digital Game of Cat and Mouse

Forget the stereotype of elderly victims falling prey to smooth-talking fraudsters. Today, it’s the digital-savvy millennials and Gen Z consumers who are more likely to take the hit, per PYMNTS Intelligence. These generations, often perceived as tech-literate, are still frequent targets for scams like identity theft, fake eCommerce schemes and investment fraud, which can deliver devastating financial blows.

Scammers do more than deceive their targets. These criminals contribute to undermining trust and confidence in FIs, online transactions and the financial system as a whole.

Financial institutions sit at the front lines of this battle and have an opportunity — if not an obligation — to take a stand. From advanced fraud detection technologies to streamlined reporting processes, FIs can empower consumers with tools to detect, report and recover from scams.

The fight against fraud is a dynamic and high-stakes battle. As fraudsters continue to refine their strategies, FIs must demonstrate equal agility by embracing innovation and prioritizing customer protection. Institutions that fail to adapt risk not only financial losses but also erosion of customer trust — a critical component of their long-term success.