Preventing Fraud in Fintech

Imagine a world without PayPal, online bill payments or cryptocurrency. Financial tech (Fintech) encompasses everything from mobile banking to using an ATM, and it plays an increasingly important role in daily life. That makes it a prime target for fraudsters. Identity theft, phishing and money laundering are three of the most prominent crimes in the industry, and preventing them requires embracing the very technology that makes them possible.

Fintech has given users unprecedented control over their finances. Paying a hospital bill is as simple as logging into an online portal, inputting credit card information and submitting a form. Automation saves time, lowers costs and increases efficiency in the financial sector. It also reduces manual typographical errors and leads to better compliance. 

But for all of its benefits, fintech has notable downsides. Cybercriminals exploit the technology to steal identities, defraud people and launder money, leading to massive data breaches and drained bank accounts. A full 54% of successful phishing attacks in 2021 led to leaked client information and 17% caused financial loss or invoice fraud. 

The world is embracing fintech with open arms, so it’s more important than ever for industry professionals to protect their customers. That requires the use of strong, trusted data and technology to mitigate fraud and maintain compliance. How can fintech companies strike a balance between security and a smooth customer experience?

1. Strong KYC Onboarding Processes

Know Your Customer (KYC) procedures during customer onboarding help ensure that only legitimate clients access fintech services. KYC services help automate Customer Identification Programs (CIPs), comparing known digital and physical identity elements to user-provided documentation and information. This process confirms whether the person is who they say they are.

It’s important for fintech firms to balance KYC compliance processes with a smooth user experience. Clients may become frustrated at having to repeatedly verify their identity, but rapid onboarding processes offer an opening for threat actors to use stolen or synthetic data to commit fraud. Luckily, digital onboarding processes are usually much faster than traditional pen-and-paper applications, so it’s possible to integrate them into a positive user experience.

Strong digital onboarding must make data available in a machine-readable format so backend systems can process it. KYC processes should occur in real time and create a transparent risk score for every client. They must screen customer inputs against complete, trusted information as well as complete adverse media checks. In some cases, the KYC compliance process involves facial matching checks. 

2. Risk Screening for Customer Profiles

Risk screening is critical because some customers are at a higher risk of experiencing fraud than others. Risk scoring and continuous monitoring help determine the risk level for each customer, giving team members control over their fraud prevention strategies. Multiple factors come together to create the customer’s risk score. 

Customers with the highest scores may trigger a rule-based system alert so risk and compliance teams can pay close attention to them. Risk scoring should be dynamic, changing along with circumstances to offer an up-to-date score. Risk analysts can decide which criteria are most important for identifying clients with a higher fraud risk, incorporating these metrics into the scoring system. 

3. Automated Transaction Monitoring and Screening

Customer risk changes over time, so risk assessments must be ongoing and kept up-to-date. In addition to screening customers based on their risk level, one crucial aspect of preventing fraud in fintech is to carefully monitor all customer transactions. 

AI software can detect unusual patterns and behavioral anomalies that could indicate a cybersecurity issue. A customer’s usual behavior serves as a baseline for detecting any suspicious activity. 

For example, if a customer suddenly makes a very large purchase, uses a buy-now-pay-later service or performs a transaction in the middle of the night in their time zone, AI cybersecurity software will compare it to historical data and flag the event. The alert allows specialists to quickly look into the matter. 

A survey found that 52% of companies reported their IT teams spending too much time performing manual data collection. Because constantly monitoring customer behavior would be expensive and tedious, automation is a vital part of preventing fintech fraud. 

4. Use AI to Identify High-Risk Alerts

Artificial intelligence can go a step further than just flagging suspicious activity. Some AI services also feature machine-learning-powered predictive alert scoring. This technology sorts alerts by relevance and urgency, helping teams prioritize which alerts need the most attention. 

Specialists can also adjust the AI software to cause certain data points — such as address changes — to trigger additional KYC processes based on current risk parameters. These are known as change-of-circumstance alerts.

As much as digital financing has opened up our world, it has also created new avenues for threat actors to steal people’s funds and personal information. To counter it, fintech professionals must use secure onboarding processes, automated transaction monitoring and risk screening for every customer and transaction.