Among all the suspicious activity that financial institutions (FIs) encounter, 42% relate to identity. With dark web ID data dumps and artificial intelligence (AI) tools available for bad actors, these schemes may become easier to execute. This could be especially true regarding fraud against digital-first entities such as FinTechs. This component is just one of the escalating levels of concern among FinTechs and the consumers who use them. How can FinTechs address the growth of fraud and meet the demands of their ecosystem while safeguarding customers’ finances?
“How FinTechs Are Fighting Identity Theft and Identity Fraud” is the third edition of the Identity Verification Series, a collaboration between PYMNTS Intelligence and Intellicheck. It explores fraud and verification issues in the FinTech industry and details current and future technologies and legislation surrounding fraud prevention.
Fraud Concerns
FinTechs are a fraud target, with automated systems and financial transactions on the line.
When splitting a bill or making a quick digital payment, consumers expect their FinTech-operated systems to be friction-free. But no transactions escape the watchful eyes of fraudsters. FinTechs’ automated systems and connections to transactions, such as peer-to-peer (P2P) payments, render the industry a keen target. Roughly one-third of FinTechs report recently experiencing fraud, which has trended up in the financial industry. In the United States, FIs witnessed fraud losses increase by approximately 65%, rising to an average of $3.8 million lost last year.1,2
Further, bad actors are increasing their sophistication. The difference between fraud attempts and regular transactions can be very difficult to observe. In many cases, this is how fraudsters attack. Authorized fraud (when an individual initiates a payment to a fraudster) makes up 46% of fraud among FIs with assets of more than $100 billion.3
The growth of identity-related fraud is leaving its mark on FinTechs, among other industries. The Financial Crimes Enforcement Network (FinCEN) revealed that identity-related suspicious activity comprised 42% of all suspicious banking activity, totaling $212 billion in 2021.4 Most FIs reported impersonation as their key identity fraud-related threat. However, FinCEN data revealed that verification circumvention turned out to be the most reported type of fraud.5
Financial Tolls
Fraud attacks targeting FinTechs are hitting consumers hard with financial losses.
The battle against fraud is largely fought on the internet. Online and mobile banking make up 75% of fraud attempts FinTechs reported, meaning human touchpoints like contact centers and bank branches account for just one-quarter of those attempts.6 Whether individuals bank online, on apps or in person, consumers can cross paths with fraudsters. FinTechs must invest in alerts and other ways to mitigate fraud threats.
Failure can be extremely costly. For example, 1 in 5 consumers reported losing more than $5,000 from financial exploitation on apps such as Zelle, PayPal and Venmo.7,8 The consequences are not just financial. The uncertainty of recovering financial losses results in 80% of financial fraud victims dealing with stress, anxiety and psychological distress.9
The Complications of Compliance
Compliance is a challenge for most FinTechs.
FinTech fraud vulnerabilities can spread to the entire FinTech ecosystem, including their sponsor banks. FIs are working hard to comply with regulatory changes and expectations, which can be challenging. In fact, 33% named this their main concern in a 2024 Global Financial Crime Report.10
FinTechs seem aware that they are lagging in catching up to banking regulations. According to the American Bankers’ Association, 93% of FinTechs find it challenging to remain in compliance with regulations. But 55% of FinTechs cited a lack of automation around compliance as one of the key barriers to meeting demands. Regulators, however, have a renewed vigor to hold FinTechs more accountable for their security and verification measures’ ability to counter fraud.
New Innovations
Confronting escalating fraud, FinTechs are taking steps to introduce new fraud prevention tools, including AI.
With all this pressure, updating security infrastructure is top of mind for many FinTechs. Fifty-two percent of FIs plan to implement or increase the use of AI or machine learning (ML) fraud prevention tools. While automation remains a challenge for FinTechs, data suggests the key is getting it off the ground. FIs currently using AI are 17% more likely to implement additional AI or ML solutions than those not currently doing so.11
FinTechs in the U.S. and United Kingdom have identified specific anti-fraud technologies they are looking to invest in this year. These include anti-scam education tools — 81% of FinTechs identified these as a potential investment. They are also interested in document verification software (65%) and identity risk solutions (55%). Smaller shares are interested in alternative data vendors (29%), biometrics (29%) and ML (19%).12
Further, FinTechs are actively launching their own products specifically designed to counter fraud. Recent examples of these FinTech tools include:
- Fortress Payments is using Paravision’s selfie biometrics and liveness detection to upgrade its user onboarding and checkout security.13
- Tiller Technologies’ software is used for a digital identity verification solution to streamline onboarding for international banking customers.14
- Fintech360 and FUGU also recently launched tools for FinTech security. The toolset uses transaction monitoring, pattern analysis and AI to counter fraud, including stolen identities, account takeovers and friendly fraud.15
The identity effectiveness framework
Figure 1
The identity effectiveness framework
Relative importance of specific aspects of identity verification processes in the real estate and title, automotive, and FinTech industries
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Real Estate/Title |
Automotive |
FinTech |
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Fraud detection
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| Postal address verification |
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| Email verification |
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| KYC compliance regulations |
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| Photo ID bar code verification |
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| Passport scanning |
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| Criminal screening |
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| NIST certified facial biometrics |
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| PAD level liveness detection |
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| OCR document comparison |
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| Fraud and risk scoring |
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| Global watchlist data screening |
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| Proxy detection and IP address reputation scoring |
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| OFAC, sanctions, PEP and criminal screening |
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| Email validation and verification of email digital footprints |
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| Bot, Tor, emulator and GPS spoofing detections |
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| Adverse media monitoring |
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| Phone carrier lookup |
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| Device ID fingerprinting |
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Account onboarding
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| Postal address verification |
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| Email verification |
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| KYC compliance regulations |
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| Photo ID bar code verification |
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| Passport scanning |
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| Criminal screening |
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| NIST certified facial biometrics |
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| PAD level liveness detection |
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| OCR document comparison |
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| Fraud and risk scoring |
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| Global watchlist data screening |
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| Proxy detection and IP address reputation scoring |
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| OFAC, sanctions, PEP and criminal screening |
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| Email validation and verification of email digital footprints |
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| Bot, Tor, emulator and GPS spoofing detections |
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| Adverse media monitoring |
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| Phone carrier lookup |
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| Device ID fingerprinting |
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ID validation: Age verification
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| Photo ID bar code verification |
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| Passport scanning |
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Conclusion
FinTechs and consumers can face fraud losses at a moment’s notice. A need to address the increasingly sophisticated fraud methods that target their operations and finances has taken the spotlight. However, the dawn of new technologies, ranging from AI to identity verification systems, can help. Investments in stronger boundaries against fraud can protect FinTech products’ integrity and the consumers investing time and money in them. To appease regulators and disappoint fraudsters, the FinTech industry has work to do.
Footnotes
1. [Financial Institutions Revamping Technologies to Fight Financial Crimes. PYMNTS Intelligence. 2023. https://pymnts-com-develop.go-vip.net/study/financial-institutions-revamping-technologies-fight-financial-crimes/. Accessed August 2024.]↩
2. [Better Together: Embracing Data Consortiums to Prevent Payments Fraud. PYMNTS. 2024. https://pymnts-com-develop.go-vip.net/fraud-prevention/2024/better-together-embracing-data-consortiums-to-prevent-payments-fraud/. Accessed August 2024.]↩
3. [Leveraging AI and ML to Thwart Scammers. PYMNTS Intelligence. 2024. https://pymnts-com-develop.go-vip.net/study/leveraging-ai-ml-authorized-fraud-scams/. Accessed August 2024.]↩
4. [Author unknown. FinCEN Issues Analysis of Identity-Related Suspicious Activity. Financial Crimes Enforcement Network. 2024. https://www.fincen.gov/news/news-releases/fincen-issues-analysis-identity-related-suspicious-activity/. Accessed August 2024.]↩
5. [Ibid.]↩
6. [Author unknown. 2024 State of Fraud Benchmark Report. Alloy. 2024. https://use.alloy.co/rs/915-RMN-264/images/2024-State-of-Fraud-Benchmark-Report_Alloy.pdf. Accessed August 2024.]↩
7. [Gunther, J. Fighting Financial Exploitation on Person-to-Person Payment Platforms: What Consumers Want. AARP. 2024. https://www.aarp.org/pri/topics/work-finances-retirement/fraud-consumer-protection/fighting-financial-exploitation-person-to-person-payment-platforms.html. Accessed August 2024.]↩
8. [Tompor, S. It’s hard to reverse scams on peer-to-peer payment apps like Venmo, PayPal, Zelle. Detroit Free Press. 2024. https://www.freep.com/story/money/personal-finance/susan-tompor/2024/02/08/venmo-zelle-paypal-payment-app-scam-reversible-reimbursement-protection/72490713007/. Accessed August 2024.]↩
9. [Grinberg, D. FinTech Fraud Prevention: Safeguarding Financial Transactions with Cutting-Edge Strategies. TechMagic. 2024. https://www.techmagic.co/blog/fintech-fraud-prevention/. Accessed August 2024.]↩
10. [Nasdaq Verafin. 2024 Global Financial Crime Report. https://verafin.com/nasdaq-verafin-global-financial-crime-report/. Accessed August 2024.]↩
11. [Leveraging AI and ML to Thwart Scammers. PYMNTS Intelligence. 2024. https://pymnts-com-develop.go-vip.net/study/leveraging-ai-ml-authorized-fraud-scams/. Accessed August 2024.]↩
12. [Author unknown. 2024 State of Fraud Benchmark Report. Alloy. 2024. https://use.alloy.co/rs/915-RMN-264/images/2024-State-of-Fraud-Benchmark-Report_Alloy.pdf. Accessed August 2024.]↩
13. [Burt, C. Fintech platforms add selfie biometrics to protect against payments fraud. BiometricUpdate.com. 2024. https://www.biometricupdate.com/202402/fintech-platforms-add-selfie-biometrics-to-protect-against-payments-fraud/. Accessed August 2024.]↩
14. [Author unknown. Local FinTech company launches digital identity verification solution. Bailiwick Express: Jersey Edition. 2024. https://www.bailiwickexpress.com/jsy/business/local-fintech-company-launches-digital-identity-verification-solution/. Accessed August 2024.]↩
15. [Author unknown. Fintech360 Partners with FUGU to Elevate Fintech Security Measures. Global Fintech Series. 2024. https://globalfintechseries.com/fintech/fintech360-partners-with-fugu-to-elevate-fintech-security-measures/. Accessed August 2024.]↩
