Article by KOSEC – CEO of Kodari Securities, Michael Kodari.
Fintech fraud is growing rapidly. As society becomes more dependent on technology, the sad truth is that it is also becoming more vulnerable to cybercrime.
Borderless, sophisticated and almost invisible, cybercrime is committed anonymously, on a large scale and at a distance; sometimes, and even literally, a world far from its victims.
It’s a challenge that FinTech and financial institutions large and small – just look at payment giant PayPal – can’t seem to escape.
Fraud in the pandemic
It gets even more complicated when there’s a global pandemic in the mix. Since COVID-19 emerged in 2020, the risk of fintech fraud has skyrocketed.
With government-imposed lockdowns and related movement restrictions forcing more people to stay home, online shopping has exploded. This accelerated shift from in-store to online purchases has led to a decline in the use of more secure cash and card payments in person.
The pandemic has also seen PayPal add 120 million new customers. Or did he? With a new marketing campaign that enticed new customers to sign up by depositing money into their accounts, the company became a prime target for fraud. Bots (software created to visit websites and perform actions automatically), pretending to be real people, began to take advantage of these incentives by creating accounts.
It was a learning experience to the tune of a 25% stock crash. As a result, Paypal changed its customer acquisition strategy from incentive programs to commitment programs to help protect against fraud.
The Cost of Fraud: A Billion Dollar Case
In July 2021, the Australian Government-sponsored Australian Institute of Criminology said the total economic impact of pure cybercrime in Australia in 2019 was $3.5 billion.
Let’s take a closer look:
- $1.9 billion – money directly lost by victims
- $597 million – money spent to deal with the consequences of victimization
- $1.4 billion – money spent on prevention costs
- $389 million – amount recovered by victims
On top of that, Australian government statistics reveal that 50% of the cost of cybercrime to Australians relates to computer access crimes – the hacking into a network or computing device to obtain information or data including credit card details, photos and personal identity information. , without authorization.
These losses are believed to have been conservatively estimated, as many victims could not precisely quantify how much had been lost or how much had been spent to deal with the consequences of the crime.
The unintended impact
Currently, there are limited options available to fintech companies to reduce fraud in the current environment. The biggest challenge these companies face is implementing fraud detection methods that don’t unintentionally affect the customer.
This impact can be the downside of compliance measures and other operational procedures designed to detect or prevent fraudulent activity that compromises usability and operational efficiency. Consumers tend to resist these service barriers and direct their business to e-commerce sites that provide a path of least resistance to anti-fraud measures. This is exactly what cybercriminals want to see and it is the toughest challenge facing FinTech companies today.
Traditional fraud minimization measures, such as real-time auditing and reporting, are expensive and not always effective. Moreover, existing identity authentication measures, such as one-time SMS codes and knowledge-based authentication measures, can no longer thwart digital criminals. For example, one-time SMS codes can be rerouted, and even the most novice hackers can easily identify the response to your mother’s maiden name.
While fraudsters will always find a way around the system, businesses always have ways to protect themselves and their customers.
How to beat fraudsters at their own game:
- Stay nimble: Financial institutions need to develop fraud prevention strategies and tactics that allow them to respond quickly and scale.
- Embrace innovation: Financial institutions and other fintech companies need to invest in a new digital security infrastructure that does not compromise operational efficiency and customer satisfaction. Available options include biometric identity authentication measures – think fingerprint, eye and face identification or voice recognition. This technology is advancing rapidly and is now also extending to behavioral biometrics, such as keystroke dynamics or how objects are used.
- Decision with data: Compiling enough data to make a good decision requires more than payment data; businesses also need to look at location ID data, digital ID data, and unique customer data and cross-reference them to get the full picture and ultimately stop fraudsters in their tracks. When financial institutions combine payment data with all known elements, they paint a more accurate picture of what is normal and what is fraudulent.
At the end of the line : Although cybercrime protection requires scalable solutions that require significant capital outlay, the investment is worth it. More traditional fraud prevention solutions no longer keep up with the growing sophistication of cybercriminals.
Article by KOSEC – CEO of Kodari Securities, Michael Kodari.
