The Future of Fraud Detection

Tech’s Role in Securing Digital Financial Services

Written in May 2021 and published on Medium. Original post here.

Photo by Freddie Collins via Unsplash

Over the last decade, our day-to-day interactions with financial services have moved online. Consumers are increasingly expecting a digital-first experience and are demanding the ability to access, review, and interact with their money wherever they may be. The pandemic only accelerated this shift, reshaping consumer behavior as many were unwilling or unable to access local branches and were incentivized to adopt new technologies such as mobile check deposit or contactless payments. While this digital-first world has many benefits including opening up access to financial services and broadening consumer choice, it has also created an opportunity for fraudsters and malicious actors. In 2020, as consumers relied increasingly on digital financial products, identity fraud losses totaled a whopping $56B.

The problem: staying ahead of fraud while providing a good customer experience

Historically, banking and financial services naturally focused on the local communities they served. In a digital world, it’s not as simple as matching the face in front of you to an ID and malicious actors are increasingly sophisticated in the ways they disguise themselves and impersonate real customers.

Failure to properly identify bad actors has consequences beyond the losses due to the fraud itself. By law, financial services providers are responsible for performing “Know Your Customer” (KYC) checks during account opening as well as “Anti-Money Laundering” (AML) monitoring on ongoing transactions to weed out criminal & terrorist activity. Financial services providers that fail to comply face punitive fines or being stripped of key licenses — in fact, over the last decade, regulators have imposed $26B in fines for non-compliance.

Another key consequence is churn from poor customer experience. If financial services providers are overly cautious in the activities they flag and have high false-positive rates (i.e. flagging an action as fraudulent when it’s really a legitimate customer action), consumers get frustrated. Imagine having your card declined constantly when you’re trying to make legitimate purchases and having to go through the process of getting it unlocked — you probably wouldn’t be with that provider for long. The same goes for lengthy account opening flows or the need for manual verification and review. Consumers have come to expect fast and easy, so a poor sign-up experience can lead to high application abandonment rates or lower utilization. This leaves financial services providers needing to balance declining suspicious activity with providing a good customer experience.

The fraud landscape is rapidly evolving

Players including the credit bureaus, Dun & Bradstreet, and Nice Actimize provide fraud prevention solutions that help identify bad actors. However, not only were many of these solutions developed for an analog world, but many have also not kept up with the rapidly evolving landscape of modern fraud tactics. For example, synthetic fraud occurs when a fraudster combines stolen identification from multiple different real people to create a real-looking credit application and applies for credit. This triggers the creation of a credit file with the bureaus for that “synthetic” individual — providing them with legitimacy to apply for various financial products.

A number of high-profile security breaches over the past couple of years means there is no shortage of compromised data on the web and organized crime syndicates and terrorist organizations are now using this data to mount increasingly sophisticated attacks on financial services providers. The fraud of tomorrow is likely to look very different from today.

The role for technology

These are problems that can uniquely be addressed by technology. Fraud pays well, so bad actors are constantly searching for new ways to obscure their intentions or small weaknesses to exploit. This new digital world needs solutions that can adapt quickly and combine data with sophisticated analytics to stay ahead of the curve in an ever changing fraud environment.

There’s many different ways in which startups are helping fight this growing threat. Players like IDology, Veriff, Au10tix, and Onfido are making it possible to do identity verification in onboarding flows digitally. New data sources or analytics model providers like Middesk, Sentilink, Unit21, and Prove power better detection of bad actors and fraudulent activities. Companies like Alloy and Persona are helping customers weave together different data sources and create automated verification workflows that free compliance teams from the burden of manual review.

This barely scratches the surface of what can be built to support the transition to a fully-digital financial ecosystem. There is a growing need for cutting-edge solutions in this space and I expect we will continue to see some of the best technical and financial services talent take up the challenge of fighting financial crime in new and creative ways.