How to Detect and Prevent Fraud in Fintech: Top Methods + Solutions

August 23, 2022

The digital age has allowed the Fintech industry to expand, offering customers accessible and convenient solutions for everything financial. Unfortunately, the world of fraud has also seen consistent innovation, and Fintech has become one of the biggest targets.

Those who work in Fintech know that fraud poses an ever-growing threat. As the number of fraud cases grows, risk and compliance teams need to prioritize a prevention and detection strategy that will keep their companies and customers protected from emerging threats.

To help you implement the best anti-fraud strategy for your Fintech company, we’ve compiled important information, methods, and solutions - sorted into the following sections:

Before we get into the top methods and solutions for tackling Fintech fraud, let’s briefly explore why anti-fraud in Fintech is important.

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The Importance of Anti-Fraud in Fintech

There is no question that Fintechs are a prime target for fraud; current statistics show that Fintech companies experience an average fraud rate of 0.30%, which is twice as high as the credit card fraud rate (0.15 to 0.20%) and triple the debit card fraud rate (0.10%). Clearly, bad actors aren’t going to stop targeting Fintech for their schemes anytime soon.

As more fraudsters look for vulnerabilities within these companies’ cybersecurity, risk and compliance teams feel increased pressure to establish effective strategies to combat fraud in Fintech. Focusing efforts on strengthening your fraud prevention methods is the only way to balance security with business growth - especially when fraud losses can put your revenue and reputation at risk.

4 Fraud Prevention Methods for Fintechs

With fraud growing in the Fintech space as rapidly as it is, risk and compliance teams need fraud detection solutions that will help them combat these efforts. Otherwise, they could be overwhelmed by the amount of successful fraud attempts - and the fraud losses that follow.

Below, we cover the top 4 methods for fighting off Fintech fraud:

1. Secure Customer Onboarding

While a quick and easy customer onboarding process is a competitive advantage for Fintech companies, this is also how criminals have been able to use stolen or synthetic information to commit acts of fraud. Increasing security measures during customer onboarding is one of the best ways to stop fraud in its tracks.

Robust Know Your Customer (KYC) processes at customer onboarding allow your Risk and Compliance team to ensure that only legitimate users access your Fintech services. Integrating KYC/KYB services into your onboarding workflow allows your Risk and Compliance teams to automate their Customer Identification Program (CIP) for a large percentage of the overall customer pipeline. Known physical and digital identity elements are compared with the documentation and information a user has provided, confirming if the user is who they say they are. Do your best to make this as frictionless as possible for customers, while still performing all necesssary checks.

Restrict access with improved ATO fraud detection in place, ensuring fraudsters never get on the platform in the first place.

2. Automated Transaction Monitoring and Screening

Customers' behavioral patterns in Fintech platforms (session time, typical transaction amounts, frequency of transactions, active times, etc) can be used as parameters to help identify when suspicious activity occurs. However, this is insurmountable from a resource perspective. Fraud specialists cannot continuously monitor each user's activity on the Fintech platform, making automation a crucial part of the process.

By using the above data types to create rules for detecting potential fraud, your fraud risk team can reduce the effort needed for transaction monitoring and screening. All accounts can be monitored in real-time for unusual activity, which is then brought to your team’s attention for review. These automated workflows increase your ability to detect fraud while helping fraud specialists focus their efforts on policies and thresholds to prevent further illicit activity.

3. Leverage Machine Learning to Prioritize High-Risk Alerts

To make the most of automated transaction monitoring, your team needs to ensure important transactions and customer updates aren’t missed. Incorporating notifications and alerts into your workflows will help your risk and compliance teams monitor suspicious activity.

Leveraging a solution that has predictive alert scoring (powered by machine learning) helps your team prioritize the alerts that matter most, allowing them to make the most of their investigation time and bring greater value to their parent organization by acting quickly and decisively against high-risk activity.

4. Ongoing Risk Screening for Customer Profiles

Some customers can be at a higher risk of being defrauded than others, which is why certain Fraud and AML solutions have risk scoring and ongoing monitoring capabilities.

Using risk scoring along with continuous monitoring to determine the level of risk per customer gives your team further control over your fraud detection strategy. Risk Analysts can choose the most important criteria when identifying users at higher risk for fraud and then use these criteria to create their scoring system. Customers with the highest scores can then generate an automatic alert through rule-based workflows, so risk and compliance teams know where to turn their attention.

The consistent thing about risk thresholds is that they vary from Fintech to Fintech, (for example, think of risk vectors in crypto vs neobanking). Additionally, some end customers can be inherently riskier than others, which is why most Fraud and AML solutions today provide ongoing monitoring capabilities.

Using continuous screening to stay up-to-date on the level of risk per customer provides further control over your fraud detection strategy. Automated alerting in cases of new threats, as well as alert grouping by entity, allows Risk analysts to obtain an aggregated view of their customers’ overall risk profiles to make decisions in real time.

The Best Solution for Detecting and Preventing Fraud in Fintech

While there are various methods for Fintech fraud prevention and detection, your risk and compliance team needs to use the right solution to implement them efficiently.

Automation is the key to staying on top of fraud in Fintech, so you need a solution that allows for this at every step. Unit21 allows you to automate fraud detection in Fintech using data-based rulesets.

These are some of the features that make Unit21 a great solution for Fintech fraud detection and prevention:

  • Identity Verification: KYC/KYB data partners are integrated into your onboarding workflows to verify your customers are who they say they are.
  • Data Monitoring: User activity, such as transactions and logins are screened in real-time and compared against historical data to detect suspicious activity.
  • Predictive Scoring for Alerts: Machine learning and predictive analysis help your risk and compliance team prioritize the most important alerts for investigation.
  • Case Management: Potential fraud cases are easily viewable on one dashboard, and automated SAR reporting will allow your team to inform FinCEN and other agencies of confirmed suspicious activity. 
  • No-Code Workflows: Custom rules and workflows can be set up independently by operators, eliminating the need for post-integration code changes in your environment.

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Fintech Fraud Prevention: Final Thoughts

Now that you know more about fraud detection and prevention in Fintech, your team can start to implement solutions that will help keep your company secure. It's also a good idea to know what the worst fraud practices are so you can be sure to avoid them. Unit21 offers everything you need to fight off fraud - we even helped PrizePool prevent $500K in fraudulent transfers.

A comprehensive anti-fraud strategy will likely include Regtech software to ensure compliance. Even more importantly, a good fraud and compliance operation will encourage cooperation between risk and product teams throughout the development process. It's crucial to stay on top of the latest fraud threats and ensure you're protected.

Learn how Regtech fits into the Fintech industry and why it's so important. Always be on the lookout for potential threats, from money muling to acount takeover fraud, and do your best to eliminate them in their tracks.

Book a demo with us today, and we can discuss how our solution can help your team improve your fraud detection and prevention strategy.

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