Digital fraud has become a hazard that many organizations, including the fintech industry, have had to deal with for some time. As the popularity of fintech firms grows, it is critical that they use sophisticated fraud detection tools. Undoubtedly, numerous organizations that provide fintech app development services are assisting in implementing digital transformation in the fintech industry by utilizing such technology. They may protect their clients and businesses from malpractices by doing so.
- According to research, the quantity of data compromised in the United States in 2021 was 68 percent more than in 2020.
- According to an Aite-Novarica Group research, 47% of Americans encountered financial identity theft in 2020.
- The key to effectively preventing fraud in the fintech industry is to implement a system that can predict and detect fraudulent acts before they occur.
- Participants in the industry should invest in a fraud detection and prevention team whose primary task is to monitor the market and report any unexpected instances or events.
What is the Importance of Fraud Detection in Fintech?
As the amount of electronic transactions rises, identifying and detecting fraud via traditional methods and data analysis becomes increasingly difficult. Because fraud gets more complex and technologically advanced while creating products, end-users are unable to protect themselves.
Fraud prevention regulations, such as the UK's Fraud Act 2006, the US's 18 U.S. CODE, and the Insurance Frauds Prevention Act, specify that financial service providers are legally liable for fraud damages, which raises the cost of doing business.
The amount of data in every business is increasing dramatically, which increases the issue of identifying fraud in fintech projects. Machine learning systems are required to deal with massive volumes of data.
Ways to Identify and Prevent Fraud Using Various Technologies
Understanding the forms of fraud that occur regularly in the sector is the first step in effectively fighting digital fraud. Some of the most frequent kinds of fraud are identity theft, phishing, web skimming, social engineering, and botnet attacks.
In these sorts of assaults, the perpetrator steals the victim's identity, poses as another person, installs harmful software/bots on their account, or convinces them of a negative occurrence on their account in order to steal money from them.
Here are a few ways that fintech businesses can leverage technology to identify fraud;
- Maintain AML/KYC Compliance: Anti-Money Laundering (AML) and KYC compliances are time-consuming yet critical for maintaining data security and privacy. Fintechs should make certain that they are following the norms and not breaking any of them.
- Strict Customer Onboarding Process: The shift from physical to digital onboarding has substantially changed the total customer experience journey. However, in the process of making things more efficient and frictionless, financial institutions should ensure that they are performing the necessary checks and balances in terms of verification and record-keeping to ensure system security.
- Continuous Monitoring: Once the KYC and initial onboarding are finished, organizations should audit their client files on a regular basis to confirm that everything is in place and that no unusual behavior is occurring. A frequent audit of customer data, for example, can assist bring to light any unusual behavior or red flags that may be part of a larger criminal activity.
- Strict Procedures for Changes in Status: Institutions should have a clear, rigorous, and disciplined mechanism in place to record any change in conditions in their clients' accounts.
- Blockchain: Scammers are always devising new methods to take advantage of unsuspecting victims in the fintech business. Blockchain is a distributed ledger technology that may be used to securely store and communicate data. Blockchain has the ability to change the financial sector by making it more transparent and efficient since it is tamper-proof and decentralized. Blockchain, in particular, may be utilized to detect and prevent fraud in the fintech industry. For example, when a consumer makes a payment, the transaction may be recorded on the blockchain and verified by all parties. It would be far more difficult for criminals to perpetrate payment fraud if they had to modify the transaction record on all copies of the blockchain. Similarly, blockchain might be used to verify consumer identities and prevent identity theft. Fintech businesses may use blockchain to establish a more secure and transparent environment that is less vulnerable to fraud.
- Biometrics: Biometrics, such as fingerprint or iris scanners, can be used to verify consumers and avoid impersonation fraud. In recent years, biometrics has been an increasingly common method of identifying and preventing fraud. Biometrics are distinguishing physical or behavioral features that may be used to identify a person. This technology is used by biometric POS systems to give a high level of security through user verification.
Fintech businesses are rising as consumers get more comfortable digitally managing their finances. These businesses provide a wide range of services, including online banking and investing, as well as mobile payments and cryptocurrencies. As these businesses expand, so does the risk of fraud. Sanction Scanner may assist organizations in integrating numerous technologies to protect themselves from cybercrime.
With a better understanding of fraud detection and prevention in Fintech, your team can begin implementing solutions that will help keep your firm safe. To guarantee compliance, a complete anti-fraud plan would contain Regtech software. Learn how and why Regtech is vital in the Fintech business. By incorporating KYC/KYB services into your onboarding procedure, your Risk and Compliance teams may automate their Client Identification Program (CIP) for a significant portion of the entire customer funnel. Known physical and digital identification factors are matched to the paperwork and information given by the user, validating whether or not the person is whom they claim to be. Schedule a demo with us today to see how our solution may help your company enhance its fraud prevention and detection strategy.