Fraud detection in Fintech: How to detect and prevent fraud in the lending industry?

Av- Mr. Rohit Arora, CEO & Co-Founder, Biz2Credit & Biz2X

In India, technological advances have changed financial services and created a new industry known as fintech. In recent years, this industry has grown enormously in India and around the world. Fintech companies raised $ 806 million in fundraising between January and August 2021, according to Inc42data, and accounted for the second largest share of the fintech financing cake (18%). It has grown enormously as a result of simple credit business models such as peer-to-peer loans, BNPL and digital loans. It has also brought innovation into fintech-affiliated businesses and enables, such as e-KYC, payment gateways, credit scoring and so on.

The problem The trend within Fintech has caught the attention of both investors and scammers, who have developed inventive and innovative ways to scam the system and make easy money. India first scored with 25.5 billion real-time payment transactions, according to a report by ACI Worldwide, which tracks and analyzes real-time payments across 48 worldwide markets. Fraud involving real-time payments is on the rise, according to the report, as fraudsters increasingly target new channels. Identity theft accounted for 11.6 percent of all fraud cases in India, while digital wallet hacking accounted for 6.2 percent. Phishing / spoofing, identity fraud, account fraud and transaction fraud are the most common types of digital fraud that companies face. Phishing / spoofing: In recent years, this has become one of the most common methods, where targets are contacted via e-mail, telephone or text message, and pretends to be a legitimate or reliable source for tricking gullible individuals into share sensitive data or access their corporate data network. The information obtained is then used to access social media, bank accounts and other financial accounts, resulting in financial loss.

Another tactic is to imitate popular apps, which, if downloaded, can take over all data in seconds; and users who provide sensitive information such as bank account number, full name, address and other personal information are vulnerable to identity theft and have their bank accounts emptied of funds. Transaction fraud: Around 1.4 lakh cases of transaction fraud were reported in FY, resulting in a loss of around 600 crore rupees due to compromised credit and debit cards and online banking details. When fraudsters use stolen credit cards or identities to make significant purchases, it usually takes a relatively short time for the company to authenticate the user’s legitimacy. The victim usually reports loss of funds in their account after the fraud is discovered, and the company compensates the victim, but the fraudster usually goes unnoticed.

Account Fraud: When fraudsters gain unauthorized access to a person’s bank account, they take the opportunity to clear their account balance. Victims are often unaware that their personal information has been stolen before they are informed of the financial loss. Another form of unique account fraud occurs when customers with good credit holdings decide to cheat by taking out a significant loan in a bank and then disappear after
steal the funds. This type is particularly difficult to detect because it is difficult to determine the intention of the individual applying for the loan. This is most common when the macroeconomic environment is experiencing difficulties, such as job losses, and people with a solid credit history may resort to such measures out of desperation.

Synthetic identity fraud: The most common type of scam we encounter in fintech loans these days is scammers who falsify personal information, often known as Synthetic Identity Fraud. Scammers can now easily obtain personal information such as phone numbers, addresses, IDs and photos from social media that contain the majority of customers; vital and receptive data as well as deep web. The deep web is the part of the internet that is hidden behind passwords or other security barriers, making it inaccessible to common search engines such as Google, Bing and others. Generating and removing digital identities (phone numbers and email addresses) is easy. The lack of mapping between these digital IDs and offline IDs, despite various controls, further complicates the situation. The Fintech business as a whole operates in a fast-paced climate, which gives lenders little time to analyze their customers; applications; scammers; works easier.

Below are the key areas where Fintech companies come up with advanced solutions to detect and prevent fraud.

1. AI-powered KYC – The best time to prevent scammers from exploiting the system is to screen them well during the actual onboarding. Traditional banking systems employ hundreds of employees to assess borrowers’ income and spending patterns based on the transactions available on their bank statements. But manually going through pages of bank statements is tedious and prone to human error or, at times, even subjective bias. This is where the automated bank statement analyzers, called Bank Secrecy Act (BSA) engines, come to the rescue. Many Fintechs are now involved in creating intuitive and dynamic rule-based automated BSA solutions.

2. Prevent payment fraud by using multifactor authentication and biometrics – It is much more difficult for a criminal to deceive a system that uses a person’s unique physical characteristics. While passwords can be lost and stolen, biometrics act as an additional barrier for fraudsters to overcome. And although biometrics can also be falsified sometimes, but forging biometrics takes much more time and is very expensive, as opposed to hacking static login information.

3. Advanced transaction monitoring and instant notification – It is important to track customers’ transaction behavior. If an abnormal transaction history is found, the transaction should only be allowed after further approval by the customer. AI and machine learning play a crucial role in collecting behavioral data that can determine if these patterns are likely to be fraudulent. If there is a high probability of fraud, your system must be able to immediately report it to you via suspicious alerts – and in some cases block the account from further transactions. The more transparent the client’s behavioral portrait is, the less likely you are to miss out on fraud.

4. Basic network security – It is very important to educate your customers about basic security. Like leaving cards visible, clicking on unknown links, opening digital wallets by connecting to public WiFi, etc. These basic preventative measures can to a greater extent save you from Fintech scams.

Conclusion
A good system for detecting and preventing fraud should be able to detect fraudulent transactions and flag them for further investigation. Detection and fraud prevention is a continuous process. Fintech is evolving with the emergence of new technologies that utilize artificial intelligence to prevent and detect fraud, much like how fraudsters are constantly finding new ways to defraud financial institutions. Detecting and preventing fraud is a continuous effort. In the fintech industry, modern technologies such as machine learning (ML) and artificial intelligence (AI) are effective for fraud detection and prevention. As technology advances, financial institutions using these technologies will evolve and become more successful, helping the financial sector build a safe and secure digital wall against fraudsters. It must also be noted that preventing fraud does not have an easy answer. Businesses need to keep learning and updating regularly to stay ahead of the game.