FinTechs Confront Escalating Fraud as Losses Soar 65%

Distinguishing legitimate transactions from increasingly sophisticated fraud attempts places FinTech companies, with their digital-first infrastructure and seamless consumer experiences, at the vanguard of the ongoing battle against identity theft and financial deception.

The PYMNTS Intelligence report, “How FinTechs Are Fighting Identity Theft and Identity Fraud,” lays bare the challenges faced by digital financial entities in combating fraud. The scope of the problem is considerable: Among all suspicious activities encountered by financial institutions (FIs), a significant 42% is related to identity fraud. Dark web ID data dumps and advanced artificial intelligence (AI) tools help pave the way for illicit actors to ply their schemes.

• Roughly one-third of FinTechs report recently experiencing fraud, reflecting a broader upward trend in the financial industry where U.S. financial institutions witnessed fraud losses increase by approximately 65%, rising to an average of $3.8 million lost last year.
• Authorized fraud, where an individual unknowingly initiates a payment to a fraudster, accounts for 46% of fraud among financial institutions with assets exceeding $100 billion.
• The human and financial toll on consumers is substantial, with 1 in 5 individuals who used a P2P platform and lost money to financial exploitation reporting losing more than $5,000.

The battle is being fought across digital fronts, with 75% of fraud attempts reported by FinTechs occurring through online and mobile banking channels, while traditional human touchpoints account for only a quarter of these attempts.

The consequences of successful fraud extend beyond financial loss, as 80% of financial fraud victims report dealing with stress, anxiety, and psychological distress due to the uncertainty of recovering their funds.

Compliance with evolving regulatory changes presents a formidable challenge for most FinTechs; 93% of FinTechs find it difficult to remain compliant, and 55% specifically cite a lack of automation around compliance as a key barrier to meeting regulatory demands, such as the Bank Secrecy Act.

In response to this mounting pressure, FinTechs are examining new solutions to put in their anti-fraud arsenals.

We found that 52% of financial institutions plan to allocate funds for third-party solutions to combat fraud. Mid-market FinTechs are looking to invest in anti-scam education tools (81%), document verification software (65%) and identity risk solutions (55%).

Innovative solutions are already emerging, such as Fortress Payments utilizing selfie biometrics and liveness detection, Tiller Technologies streamlining onboarding with digital identity verification and Fintech360 partnering with FUGU to deploy AI-driven transaction monitoring and pattern analysis to counter various forms of fraud.

These investments in advanced identity verification systems and new technologies will be integral to the FinTech industry’s efforts to protect themselves and safeguard consumer finances.