Ciklum Editorial Team
Key Takeaways:
- Cybercrime and fraud is a pressing issue for FinTechs
- Fraud prevention and detection should go hand-in-hand
- AI can be instrumental in spotting unusual patterns of behavior
- Human education and best practice should also be considered
Fintech Innovations: Software Solutions for Fraud Prevention in Finance
Digital transformation is proving to be a real game-changer in the finance world - but increasing adoption also means increased risk of fraud. According to Gartner, nearly 80% of finance organizations have invested in artificial intelligence technologies, but only a quarter have a mature AI strategy in place.
With the threat of cybercrime increasing all the time, FinTech innovation must encompass fraud protection and compliance just as much as opportunities for growth and profitability. This blog explores the key tools and practices enabling safer finance transformation.
Explore banking technology in more detail in this blog: How to Improve Quality Assurance In Banking & Financial Applications
Common Types of Fraud in Fintech
First, it’s important to understand how finance and FinTech-related fraud happens in practice. There are four common types that affect businesses across the sector:
- Account Takeovers: When a malicious actor pretends to be a real customer to gain control of somebody else’s bank account, email or credit card details. With this access, they go on to make unauthorized transactions, either sending the money to another account they control, or buying goods or services for themselves.
- Synthetic Identity Fraud: Real personal data is stolen (for example, social security numbers or dates of birth) and combined with falsified information, in order to create an authentic-looking identity for fraudulent activity.
- Social Engineering and Phishing: When fraudsters trick users into malicious activity that reveals, or gives them access to, personal information and data. Email phishing, where users click on deceptive links in emails, is a good example of this.
- Transaction Fraud: When unauthorized or illegitimate financial transactions are conducted using stolen payment methods or account details. This can include fraudulent purchases, cash withdrawals, or money transfers, often done with counterfeit cards, stolen card numbers, or compromised banking credentials.
Core Technologies in Fraud Detection
FinTechs and other forward-thinking financial organizations are making the most of innovative technology to detect fraudulent activity - or attempted fraudulent activity - quicker than ever before. The most commonly-adopted technologies include:
- AI and Machine Learning: Real-time fraud pattern analysis, searching for trends within large datasets, and recognizing potential fraud proactively. Furthermore, self-learning capabilities mean that these insight-spotting capabilities continually improve and adapt over time.
- Behavioral Biometrics: Individual user behavior across a website or app can be tracked, and the patterns analyzed for anomalous or unusual activity. This can indicate when behavior has changed, suggesting that a malicious actor has seized the genuine user’s credentials. This helps build trust without intruding on legitimate customers.
- Multi-Factor Authentication (MFA): Enhancing security through the use of multiple verification methods, ensuring that only legitimate users can access accounts, and making it much more difficult for fraudsters to gain access.
- Data Encryption/API Security: Encrypting transaction and customer data prevents security breaches and unauthorized access to sensitive information, scrambling data which can only be unscrambled with a unique digital key.
Leading Fraud Prevention Solutions
While fraud detection software is an important part of safe FinTech operations, it should be combined with prevention technologies that help shut down threats before they can have a major impact:
Identity Verification in Finance and KYC Compliance Tools
Know-Your-Customer checks are an essential part of verifying new customers’ identities. Using ID verification tools such as Jumio and ID.me can leverage the right data to uncover previously hidden risks relating to that customer, so that the chances of potential fraudulent activity can be identified.
Automated Risk Scoring Systems
Systems like LexisNexis and Riskified use machine learning and AI to quantify the likelihood of a particular transaction or other activity being fraudulent. They can enable proactive identification of risks, and help organizations take action before any serious effects take hold.
AML Compliance Solutions
Protecting against money laundering is a vital part of financial compliance. Continuously monitoring activity and transactions can help spot and shut down cases of money laundering earlier, reducing the risk of penalties or sanctions for non-compliance with regulations.
Emerging Trends in Fraud Prevention Technology
With cybercrime and fraud tactics evolving all the time, FinTech security technology is constantly advancing to shut down even the most sophisticated attacks and operations. Some of the latest innovations include:
- Deepfake Detection and Liveness Checks: Deepfake incidents in FinTech increased by 700% in 2023, so cracking down on them should be a top priority. Biometric liveness detection helps verify that authenticators are reading genuine physical characteristics (like actual eyes, faces, and thumbprints) rather than deepfake recreations during verification processes.
- Geolocation and Device Fingerprinting: These technologies are ideal for collecting crucial device and activity data, which can be used to detect unusual activity patterns and to quantify risk. This data includes hardware and browser information, location data, IP addresses and more.
- Proactive Monitoring and Alerts: Flagging up issues as quickly as possible is vital for rapid response and remediation. Data monitoring and analytics can alert the right IT security staff to assess a potential issue in more detail, or take appropriate action proactively.
Best Practices for Implementing Fraud Prevention in Fintech
Technology is vital to protect FinTechs against cybercrime, but it isn’t the be-all and end-all. New innovations should be backed up by human best practice, to ensure that human activities don’t lead to unintentional compromises of systems and data:
Employee training and education:
Comprehensive training programs, alongside rigorous data protection and access controls, can help ensure that staff are working and operating in a secure manner. This can make them an extra line of defense rather than a vulnerability point.
User education:
The same principles of education should also apply to legitimate users, understanding how to recognize threats and make informed decisions around their online activity. Targeted education in this area can help foster a collaborative security environment.
Security audits and compliance checks:
PWC has found that 41% of businesses failed to complete an enterprise-wide fraud risk assessment within the last year. This is essential to maintaining constant vigilance, and adapting compliance strategies, so that vulnerabilities can be detected and addressed in a dynamic FinTech landscape.
In Summary: Future Directions for FinTech Security
FinTechs and their innovative flexibility have a major role to play in shutting down financial fraud in the months and years ahead. Particularly important will be the use of AI and machine learning, in conjunction with traditional systems, so that finance firms can improve fraud detection and prevention through streamlined workflows.
As cybercrime tactics evolve and advance, AI and ML will evolve and advance with it, meaning the solutions put in place to address fraudulent activity will be more future-proofed than ever before. Developing those advanced solutions with the help of software engineering and product engineering will be key to success.
