According to the Reserve Bank of India’s (RBI) annual report 2021-2022, frauds reported by financial institutions providing internet banking services or card usage increased by nearly 34% between 2020 and 2021.
With the advancement of technology and the rise of ‘banking from home,’ the number of digital frauds perpetrated by unscrupulous parties has increased significantly. From hacking into networks and databases to identity theft and phishing attacks, online fraud has become more sophisticated and organised than ever in recent years. Exploiting the vulnerabilities of unsuspecting consumers, resulting in a loss of faith in the system
These growing frauds in the ecosystem can be attributed to several factors. The fundamental one is that the digital payments chain is comprised of several different stakeholders at every stage. There are several intermediaries who transfer data between a merchant and the end consumer.
To complete a successful online transaction, the consumer sends information to the network, payment gateway, channels, networks, and banks. Thus, there is a possibility of an attack at any of these stages resulting in financial fraud.
Preventing Fintech Frauds
The first step in effectively preventing digital fraud is to understand the types of fraud that occur frequently in the industry. Identity theft, phishing, web skimming, social engineering, and botnet attacks are some of the most common types of fraud.
In these types of attacks, perpetrators assume the victim’s identity, pose as another person, install malicious software/bots, or convince them of an unfavourable event on their account to steal money from them.
To ensure these incidences can be curbed and consumer faith in the system is reinstated, here’s what the industry can do:
- Ensure AML/KYC Compliances: Anti Money Laundering (AML) and KYC compliances are cumbersome but extremely important to maintain a layer of security and privacy of data. Fintechs should ensure that they are playing by the rules here and not defaulting in any way.
- Strict Customer Onboarding Process: The transition from physical onboarding to digital has brought about a significant change in the overall customer experience journey. However, in the process of making things quicker and seamless financial institutions should make sure they are doing the appropriate checks and balances with respect to verification and record-keeping that is required to maintain security in the system.
- Continuous Monitoring: Once the KYC and initial onboarding is completed, organisations should periodically audit their customer files to ensure everything is in place and there is no extraordinary activity happening. For instance, a regular audit of customer data can help bring to light any unexpected behaviour or red flag that might be part of a bigger illicit activity.
- Strict Procedures For Status Changes: Institutions should have a predefined, robust and rigid process to record any change in circumstances in the accounts of their customers. For example for something like an address change, the addition or removal of a nominee or even for third-party fund transfer – vendors should insist on compliance with KYC procedures and other set rules to ensure the changes are authorised by the account owner.
- Multi-Factor Authentication And Biometrics: Lastly, fintechs should insist on multifactor authentication which is linked to a customer’s personal attributes. It is difficult to replicate or steal data which is characteristic of an individual like biometrics or other unique personal details. Although, it must be noted here that biometrics are also not 100% foolproof and may hinder the speed and ease of service delivery. However, compared to simple login credentials it is still safer considering replicating it is time-consuming and expensive.
Back To Basics!
The key to effectively preventing fraud in the fintech industry is to deploy a system that can estimate and prevent illicit activities before they occur. To accomplish this, industry participants should invest in a fraud detection and prevention team whose primary responsibility is to monitor the market and flag any unusual incidences or situations.
Fraudsters and perpetrators are innovating and upgrading their practices as we speak. To keep up with this, the industry must also ensure that they are constantly updating itself. Thinking like a criminal and utilising AI/ML tools is also a good strategy in this situation.
Digital fraud and its prevention do not affect everyone in the same way. Different customers and companies may have varied experiences with them. As a result, fintech leaders should make it a point to routinely alert the larger universe to unique incidents so that all members of the system are aware.