3 Key Methods to Prevent Fraud in Fintech Startups


Many FinTech companies incorporate various methods to distinguish fraud from ordinary transactions. But it is even better to prevent fraud even before it happens.

Each founder of a FinTech startup has to remember that it is impossible to prevent fraud once and for all. Your task is to prevent it from scaling. And this is a moment where technology kicks in.

What are other AI-powered methods to prevent fraud in FinTech startups and companies? There are so many situations when fraud can happen – from identifying the credit history for better loan management to stealing user data from payment processing with credit cards.

Let’s find out together!

1) AI-powered KYC (know your client)

Nothing is a better signal of something wrong happening than comparing it with the behavior of a solid customer base. So, knowing your client, their expectations are the ways to prevent fraud.

One of the bright examples of the company that has built its AI-based fraud prevention system on KYC isVisa. It is one of the most used payment processing finance software which leverages AI for fraud prevention.

Even though Visa’s AI does not know your name or what exactly you buy, it learns every time you purchase something. It sees activities and patterns to understand what your typical purchase behavior looks like. As a result, even before their users buy something, they spot suspicious activity.

Visa’s AI assesses the fraud risk before the purchase, and your bank can thus approve/ deny your payment or send you a text asking to confirm it.

But how does it work? Every Visa account has a profile of previous transactions, which is updated each time you buy something. Thus, Visa analyses your transaction behavior which is later grouped into clusters, so they can understand whether your recent purchase fits the pattern. If it does not, it will be declined due to fraud risk. Such a fraud detection method makes a real revolution in finance when there is no need to manually trying to spot suspicious activities, and the fraud prevention software can help immediately.

Deutsche Bank also leverages AI to boost their KYC process, detect and prevent fraud.

2) Machine Learning

The vast majority of online fraud detection platforms use transaction rules that flag suspicious transactions. They use a set of rules that define if a certain transaction is safe. For instance, if you purchase something from a suspicious location, or the sum you are spending surpasses a certain amount, this transaction will be denied. As a result, such rule-based platforms are not efficient because of the large percentage of false-positive responses. So, even transactions that are safe can be labeled fraud.

Machine Learning, at the same time, can boost their efficiency level, as instead of a set of rules, it will be trained based on real user behavior. Thus, it creates an algorithm for labeling the transaction safe or fraudulent.

For instance, BNY Mellon has developed a framework aimed at fraud detection. This company provides cross-border payments services, so it needed a solution to safeguard third-party data. With the help of AI and ML, BNY Mellon improved the accuracy of fraud prediction by 20%.

3) Natural Language Processing (NLP)

In FinTech, NLP is also used to structure data stored in databases. It is required for pattern recognition and extracting insights. This technology is used for fraud detection, as it helps identify typical user behavior and thus detect suspicious activity.

In other words, it helps computers to identify human text and the spoken word. Natural Language Processing models decipher meaning, define sentiment, and structure data by categories. Just a little example of NLP fraud detection is when it analyzes payment notes in sales transactions and thus defines potential fraud via the analysis of emotive tone.

For example, Ernst & Young company is able to analyze customer signals and define cases with a high risk of losing data. It helped the bank to get a decrease of 30+% in false-positive cases.

Final thoughts on preventing fraud in FinTech

FinTech companies are rigorously searching for new opportunities to provide excellent financial services to their customers. FinTech is all about incorporating disruptive technologies to address the challenges and pains of the customers. But it means that they may witness certain fraud transactions. As where there is money, there are more and more fraud happening.

Many companies incorporate various methods to distinguish fraud from ordinary transactions. But it is even better to prevent fraud even before it happens.

So take these ideas into your business routine and enjoy non-risky proceedings.

Anatolii Landyshev

About Anatolii Landyshev

Anatolii Landyshev is a CTO & Co-Founder of Visartech Inc., a software product development agency that creates custom digital solutions for all-sized businesses operating in various industries. Within 14+ years of working in high tech, he has gained wide expertise in software development including real-time analytics applications, data management, and database development. 

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