Can a smartphone keep you and your money safe from fraud? The information stored inside your phone could soon be used to authenticate you to banks, credit card companies and other financial service providers.
According to reports from the Federal Trade Commission, smartphones contain information about everything from where its owner goes and when, to even more sensitive information, including personal bank, email and other accounts. And with new authentication technology, online and mobile financial service providers are using that information to ensure users are who they claim to be and keep fraudsters and other culprits at bay.
Nubank is one company doing just that and finding success. According to the Brazilian financial services firm, launched in 2014, it boasts a fraud rate just one-tenth that of larger banks and financial institutions.
However, according to David Velez, the company’s CEO, utilizing smartphones for security means it’s especially important to protect that information, which, as the FTC points out, can be used by fraudsters to steal a user’s identity.
PYMNTS recently caught up with Velez, who discussed using smartphones and mobile devices to authenticate users and how he and his team work to protect their customers from bad actors.
Using Phones And Friends To Guard Against Digital Fraudsters
The rise of digital and mobile technology has made preventing fraud much more challenging for financial service providers. In fact, according to Velez, online offerings are attacked by hoaxers more often than traditional offerings.
To guard against those online attacks, Velez said he and his team rely on the information that can be found on smartphones and other mobile devices to verify new customers, the very same data that hackers and fraudsters use to wreak havoc.
Nubank only allows users with smartphones to set up an account, which creates a high barrier to entry, especially in the company’s home of Brazil, where smartphone usage isn’t quite as widespread as it is in the United States.
The data contained in those smartphones also gives the company a powerful tool in the customer authentication process, Velez noted.
“Obviously, we have had a lot of fraud attempts, because the digital market has a ton of fraud,” Velez said. “The advantage of having just smartphone users is we can use just way much more data than traditional banks use, and that ends up being a huge advantage.”
The company largely relies on referrals from existing customers to grow its user base, as Velez noted that 80 percent of the company’s customers come from referrals and that the average customer introduces five acquaintances to the service.
Those referrals not only provide free advertising and opportunities to become more profitable, but they also allow Nubank’s security team to gather even more information on potential customers, giving them a better chance to sniff out fraud.
“The first thing we know about a new customer is whether he was referred by a [pre-existing] customer,” Velez explained. “That’s our first piece of data, and it ends up actually being really valuable. So, we know a lot about the customer’s credit performance and the fact that he’s a real person and a real identity.”
This also allows Nubank to know when it’s the opposite case: “We know that it’s a fraud, and a fraud invites another fraud,” Velez added. The bank uses that information to detect any credit behavior that’s cause for concern.
The company is also careful about whom it allows to open an account, he added — to date, it’s received more than 5 million applications and accepted only a fraction of them.
Building Dedicated Technology And A Credit Bureau
All of the data Nubank collects from an applicant’s smartphone for authentication purposes also helps the bank deal with what Velez said can be an ineffective Brazilian credit system.
While there is a credit bureau in the country, Velez explained, it only records missed payments or negative marks on a credit score, while disregarding positive actions. As a result, the system scores any consumer who has missed even just one or two payments harshly, and the missed payments remain on the account for a long time, making it difficult to reverse the score.
To obtain a complete picture of an applicant’s financial history, the company has built its own database and scoring system for potential accountholders. The in-house system considers a wider range of factors when making decisions than the national credit bureau. “That way, we build an internal score,” Velez said.
The company also starts new customers on varying credit limits, which fluctuate based on consumer behavior over time.
“We use credit limits very dynamically to make sure we make good decisions, especially for younger customers,” Velez said. “We get them started with a low credit limit, and then, in the first 30 or 60 or 90 days, we can learn so much more about them. Then, we can increase their credit limit, take a little more risk.”
The custom credit scoring system is one of several pieces of technology that Nubank has built in-house, and most of the fraud and identity fraud technology that Nubank uses was created by its own security team. However, it has recently embraced some partnerships with outside security vendors, Velez said.
A Wider Mobile Future
Velez believes smartphones have a broad range of authentication purposes and could be utilized by a wide range of industries in the future. Smartphone usage is growing not only in the United States but also around the world, and as more consumers embrace this technology, the devices will become even more ubiquitous security tools.
To that end, he said, the company has considered licensing its in-house security solutions to provide other authentication and digital identity verification products to other companies.
“That is probably something we will use for other products eventually,” Velez said of Nubank’s internal credit scoring system and other technology. “We’ve had a lot of interest in using that information.”
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About The Tracker
The PYMNTS.com Digital Identity Tracker™, powered by Socure, is a forum for framing and addressing key issues and trends facing the entities charged with efficiently and securely identifying and granting permission to individuals to access, purchase, transact or otherwise confirm their identity.