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Protecting Fintechs and Neobanks from Fraud: Best Practices for a Secure System

Fraudsters have become increasingly adept at exploiting vulnerabilities in the financial system, so it is essential for fintechs and neobanks to stay ahead of the curve in terms of protecting themselves from fraud.


Fraud and cybercrime in the fintech and neobank worlds have grown in recent years, with losses totaling $14.1 billion globally in 2019, according to data from the Fintech Fraud Report published by FIS Global in 2020.

As fintechs and neobanks gain popularity, so does the need to ensure their security. It is critical to implement measures such as two-factor authentication, enhancing KYC/KYB process, customer activity tracking, and investing in risk and fraud management systems to protect yourself and your customers. In this blog post, we'll explore the best practices for securely protecting your fintech or neobank from fraud.

The need to protect fintechs and neobanks from fraud

Fraudsters can use various techniques, such as phishing and social engineering, to gain access to accounts. Data breaches can lead to the theft of sensitive information, and weaknesses in security systems can be exploited by criminals.

To protect their customers, fintech and neobank platforms need to ensure their data is kept safe from cybercriminals. Moreover, businesses must be able to identify and respond to suspicious activity and fraud attempts quickly.

As the threat landscape evolves, businesses must stay up-to-date on the latest security trends and implement measures such as two-factor authentication, data access, customer activity tracking, and risk and fraud management systems.

The consequences of fraud can be severe, with businesses losing money and customers losing trust. That's why it's so important for businesses to take proactive steps to protect their fintechs and neobanks from fraud.

In addition to these measures, businesses should take advantage of the latest security technologies, such as AI-based authentication systems, real-time transaction monitoring tools, and automated fraud prevention systems.

By taking these steps, businesses can ensure the security of their customers and protect the integrity of their business.

Facts and figures about the fintech and neobank industry

The fintech and neobank industry is growing rapidly, with more and more people turning to these platforms for their banking needs.

According to a report by Accenture, the global market for fintech and neobanks was expected to reach $305 billion by 2022. In addition, the number of digital banking customers is projected to double over the next four years.

Furthermore, in 2020, most millennials (59%) and Generation Z (60%) customers are using neobank services.

According to GlobeNewswire, the market size stood at USD 112.5 Billion in the year 2021. The Global Fintech Market size is expected to reach USD 332.5 Billion by the year 2028, and is expected to grow to exhibit a Compound Annual Growth Rate (CAGR) of 19.8% during the forecast period.

These figures show that fintech and neobank services are becoming increasingly popular and demonstrate the potential for growth in the industry.

As a result, businesses must ensure that their platforms are secure and that they have the necessary measures in place to protect against fraud and cybercrime.

Examples of common fraud targeting fintechs and neobanks

1. Phishing: Scammers use fake emails, phone calls and text messages to gain access to accounts.

2. Social engineering: Scammers use various tactics, such as impersonation, to gain access to information.

3. Identity theft: Criminals use stolen identity information to set up bank accounts.

4. Data breaches: Hackers can access sensitive data and use it for fraudulent activities.

5. Payment fraud: an unauthorized person or organization obtains access to customers’ payment accounts and uses the information to make illegal payments, transfer funds, or initiate fraudulent transactions.

6. Weak security systems: Criminals can exploit weaknesses in security systems to gain access to accounts.

Let's discuss each of these points in more detail.

Phishing is a common technique used by scammers to gain access to accounts. This involves sending fake emails, phone calls, and text messages in order to obtain login credentials and personal information.

Social engineering is another method used by scammers to gain access to information. This involves using tactics such as impersonation, creating false identities, and using deception to gain access to data.

Identity theft is another form of fraud, in which criminals use stolen identity information to set up fraudulent bank accounts.

Data breaches can also lead to fraud, where hackers can access sensitive data and use it for malicious purposes.

Payment fraud occurs when an unauthorized person or organization obtains access to a customer’s payment accounts, such as debit cards, bank accounts, or online payment wallets. Criminals use this stolen information to make illegal payments, transfer funds, and even initiate fraudulent transactions. Payment fraud can cost companies millions of dollars and cause significant damage to consumer trust.

Finally, weaknesses in security systems can be exploited by criminals, allowing them to gain access to accounts and financial data.

Best practices for protecting fintechs and neobanks from fraud

Fraudsters have become increasingly adept at exploiting vulnerabilities in the financial system, so it is essential for fintechs and neobanks to stay ahead of the curve in terms of protecting themselves from fraud. Investing in the right security measures and avoiding risky practices are key components of any successful fraud management strategy.

These are some of the best practices fintechs and neobanks should follow in order to protect themselves from fraud.

1. Implement two-factor authentication: This adds an extra layer of security to account access by requiring a second form of verification, such as a one-time code sent via SMS. Implementing two-factor authentication is an essential part of any effective fraud protection strategy. By adding an extra layer of security to account access, this form of verification helps protect against fraudulent activity and ensures that only authorized users can access accounts.

2. Invest in risk and fraud management systems: For fintechs and neobanks, it is essential to start investing in risk and fraud protection early on. An effective risk and fraud management strategy entails not only knowing how to detect, prevent, and protect against fraud but also knowing how to reduce the overall cost of fraud. Equipping your risk and compliance team with the best fraud protection tool will help to reduce false-positive rates and increase revenue potential.

3. Monitor access to data: Fintechs and neobanks should monitor and control access to sensitive data and restrict access on a need-to-know basis. Monitoring and controlling access to sensitive data is an important step for businesses looking to protect their customers from fraud. By restricting access on a need-to-know basis, businesses are able to better secure and protect their data, making it more difficult for fraudsters to gain access. Additionally, this helps to increase the confidence of customers and build trust within the business.

4. Enhance KYC/KYB processes: Enhancing your Know Your Customer (KYC) and Know Your Business (KYB) processes is essential to preventing payment fraud. KYC/KYB processes help verify the identity of customers, establish the legitimacy of transactions, and monitor customer activity for fraudulent activities. Strengthening these processes can help your business protect its customers and reduce the risk of financial loss.

5. Track customer activity: Businesses should track and monitor user activity to identify suspicious behavior. Tracking customer activity is an important measure for businesses to take in order to identify and prevent payment fraud. By monitoring user activity, businesses can quickly spot any suspicious or unusual activity which may indicate fraudulent behavior. Additionally, tracking customer activity can help businesses detect any potential security breaches and take action before the fraudsters have a chance to take advantage of them.

Using technology to protect fintechs and neobanks from fraud

Technology is a powerful tool that fintechs and neobanks can use to protect themselves from fraud. By taking advantage of the latest security measures, such as artificial intelligence, machine learning, and real-time and risk-based transaction monitoring systems, businesses can identify fraudulent activities more quickly and accurately.

Utilizing Flagright’s AML compliance and fraud protection services will help fintechs and neobanks ensure they are meeting the highest standards of security, accuracy, and efficiency. It will further ensure your business is protected from fraud, maintains the integrity of all transactions, and stays compliant with regulations.

In conclusion 

Adopting best practices to protect fintechs and neobanks from fraud is essential for maintaining a secure system. Businesses should utilize the latest security measures in order to provide their customers with the highest level of security, accuracy, and efficiency when conducting financial transactions.

Schedule a free demo with us today to learn more about how Flagright’s AML compliance and fraud protection platform can protect your business from fraud.

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