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Finovate Blog
Tracking fintech, banking & financial services innovations since 1994
Fintech in Africa has experienced a growth spurt in recent years. Last month, investment banking firm FT Partners took a deeper look into the state of fintech in Africa in a report titled Fintech In Africa: Momentum is Building and the World is Taking Notice. The report examines underlying drivers of recent growth, offers details of the fintech investment scene, and provides an update on the state of important trends such as challenger banking and open finance.
Below are a handful of highlights from the 207-page report, which you can check out in its entirety on FT Partners’ website.
Underlying drivers of growth
The report highlights the multiple factors currently creating the perfect storm for fintech growth in Africa at the moment. The continent’s young, underbanked, tech-savvy population has long-favored cash, but is showing increasing favor for mobile-first technologies as mobile adoption rises and governments seek to further financial inclusion.
Some of the supporting statistics include:
Almost half of the world’s mobile money customers reside in Africa
More than half of Africans are unbanked or underbanked
65% of those in Sub-Saharan Africa are unbanked or underbanked
90% of payments are still made using cash
Mobile penetration is 80%
47% have access to internet
The African Continental Free Trade Area Agreement went into effect in 2019, opening up cross-border payments and creating the potential for a single currency.
State of Open Banking
It is well known that open banking and open finance create a wealth of benefits to end consumers– including increased control over use of their data. In addition to this, Africa is poised to benefit from open banking, which is expected to extend banks’ reach to rural populations and lower costs and barriers to entry of banking services by facilitating innovation in the space.
Nigeria, Kenya, and South Africa have each made inroads into creating formal regulation surrounding open banking:
Nigeria’s Central Bank issued its regulatory framework for open banking in 2021 and is currently working on operational, technical, and security guidelines
Kenya’s Central Bank emphasized open infrastructure as a strategic pillar for the financial services industry as part of its four-year-strategy announced in 2020
South Africa is home to six banks currently offering customers open banking services.
Challenger banking scene
Many fintechs have risen to serve the underbanked or unbanked populations in Africa, a group that makes up more than half of the country’s total population. FT Partners reports that many challenger banks are finding initial success in serving as alternative lenders to customers that lack access to traditional banking channels, and then building out a more robust set of services on top of their lending offering. Key to this, the report notes, is an efficient and reliable underwriting model.
Fintech investment scene
In 2022, African fintechs garnered $1.5 billion in funding across 135 deals. This is up significantly from 2019, when the continent’s fintechs brought in $340 million across 27 transactions.
In such a cash-heavy, underbanked society, it is no surprise to see that payments and banking technology was the most popular sub-sector for investors in 2022, having received more than $2 billion in funding volume. The report also notes that the payments and banking technology is responsible for more than half of the fintech financing deals over the course of the past six years.
New investors in the African fintech space over the past two years include:
Intelligent identity solution provider Sontiq has issued a new report on security in financial services.
The report, 2022 Digital Safety and Security Report for Financial Services, underscores the importance of engaging customers and members in the fight against cyberfraud.
Sontiq made its Finovate debut in the fall of 2021 and was acquired a few months later by TransUnion for $638 million.
Intelligent identity security firm Sontiq has warned that the growing sophistication of cybercriminals and increased awareness and concern over the challenge to digital security from the public have created both new challenges and new opportunities for financial institutions. In a new report, the 2022 Digital Safety and Security Report for Financial Services, Sontiq highlights the way cybercriminals have leveraged advanced technologies – including automation and AI – to achieve what Sontiq called a “historic level of data compromise” in 2021.
“Consumers are increasingly anxious about cyber threats, but feel unprepared to take action or deal with the fallout,” Sontiq SVP of Enterprise Risk Solutions Al Pascual said. “Notably, they don’t want generic security advice. Financial institutions can combat increased identity risks with personalized, self-service tools that are seamlessly embedded into the digital banking experience.”
Here are some of the key takeaways from Sontiq’s report.
Financial institutions must understand the threat landscape
“What consumers, organizations, and the media often misunderstand,” the report noted, “is that the data breaches with the greatest impact on individuals are often not the high-profile ones that capture headlines.” Sontiq’s research distinguishes between high-profile breaches at institutions like Facebook/Meta and LinkedIn and high-risk breaches at companies like Gallagher and Waste Management. This is because “high-risk” breaches, while involving fewer victims, tend to involve compromises of more valuable personally-identifiable information compared to “high-profile” breaches.
Synthetic identity fraud is a bigger threat than identity theft
A growing number of financial services companies are recognizing the challenge of synthetic identity fraud, with Sontiq observing that 72% of financial services firms believe that synthetic identity fraud is a “much more pressing issue” compared to traditional identity theft.
Why so? And what’s the difference?
Traditional identity theft involves stealing a real person’s PII (personally-identifiable information) and using that data to engage in criminal activity. And make no mistake: traditional identity theft is still an issue, costing $24 billion in losses and victimizing more than 15 million individuals in 2021. Synthetic identity fraud, by comparison, involves a blending of both real and fictitious information. This enables the fraudster to create a completely new, made-up identity that can then be used to fraudulently open accounts, and apply for loans and credit cards. A newer arrival on the cybercrime scene, synthetic identity fraud also comes at a significant cost. The Federal Reserve has estimated that synthetic identity fraud losses have climbed to $20 billion, making it the “fastest growing financial crime.”
Personalized, proactive identity protection gives financial institutions the opportunity to differentiate themselves
In its report, Sontiq makes it clear that consumers are uncertain about who to turn to in the event of a security breach. “Nearly half of Americans,” the report notes, “say they would not know what to do if their identity was stolen.” Because of this, more than half of American fraud victims (54%) have indicated that they believe their financial institution can play a major role in helping them “navigate and resolve their identity fraud issues.” Breach victims across generations – under 35, between 35 and 54, and over 55 – all turned to their financial institutions for assistance in comparable numbers (50%, 48%, and 44% respectively).
This has resulted in a significant growth in the identity theft protection services market. Analysts project that this market will grow at a compound annual growth rate of 9.4% over the next 10 years.
There are a variety of ways that financial institutions can seize this opportunity by deploying better anti-fraud tools and partnering with fintechs and cybersecurity specialists. But key to all of these efforts, according to Sontiq, is customer engagement. Educating financial services consumers on what to do to enhance their own online security – and what to do in the event of a security breach – is critical. Also important is the role of empowerment, and helping consumers understand what they can do to enhance their own defense against fraud.
“Getting consumers to adopt a self-service approach to identity protection also has the potential to help a financial institution better invest resources,” the report noted. “Informed, engaged customers who actively protect their identities become potent allies – finding fraud earlier and reducing overall risk to them and the financial institution.”
Download the free white paper to read the full report.
Sontiq made its Finovate debut at FinovateFall 2021. At the event, the Nottingham, Maryland-based company demonstrated its BreachIQ solution. BreachIQ identifies and diagnoses a consumer’s security breach history to provide personalized, protective actions the consumer can take to improve financial health and enhance security. The technology effectively leverages AI to turn ID fraud risk into a consumer financial health opportunity.
Launched in 2019, Sontiq was formed when EZShield acquired identity theft protection provider IdentityForce. Last spring, Sontiq announced its acquisition of Breach Clarity, a post-breach fraud specialist and Finovate Best of Show winner. In October 2021, Sontiq itself was acquired by fellow Finovate alum TransUnion for $638 million. In a statement, TransUnion said that Sontiq’s identity security technology compliments its own digital identity assets and solutions.
“TransUnion is committed to empowering consumers to shape their financial futures,” TransUnion President of U.S. Markets and Consumer Interactive Steve Chaouki said. “With Sontiq, we will ensure that consumers and businesses have a comprehensive set of tools to protect the financial profile they have built.”
There is a Super App-shaped hole in the U.S., and earlier this year, F.T. Partners published a report titled The Race to the Super App that examines the most eligible companies to fill the gap.
The report details three major categories of potential Super App contenders in the U.S., including challenger banks, large fintechs, and big tech companies/ retailers. Here is a breakdown of U.S. players in each category:
Challenger banks
Upgrade
Dave
Avant
Varo
Chime
MoneyLion
Current
Mission Lane
Oportun
Large fintechs
PayPal
Square
Robinhood
Figure
Betterment
H&R Block
M1 Finance
TrueBill
American Express
Wealthfront
Affirm
SoFi
Big tech companies/ retail
Amazon
Apple
Facebook
Google
Uber
Walmart
The report takes an extensive look at the super app industry and details two Super App models. The first is the winner-take-all model. In this approach, the Super App provider begins by offering a banking service and then expands to provide a wider range of services, aiming to eventually become users’ primary financial services tool. The second model is an aggregator approach in which the Super App provider acts as a marketplace that connects users to existing financial services.
Ultimately, banks have a choice to leverage either the winner-take-all model, in which they will build their own Super App to compete with third party players, or to take a hybrid approach in which they both host their banking products on third party marketplaces and offer third party tools to their clients within their own ecosystem. In the former approach, banks will incur competition from major players. However, when taking the latter approach, banks risk relinquishing the primary banking relationship status with their customers.
Earlier this year, PwC’s Vicki Huff Eckert published a report that looked at the impact of VC investment on the technology industry. Eckert is Vice Chair for Technology, Media, and Communications – and the global leader of New Ventures and Innovation – for PwC. She will be featured at FinovateSpring next week in San Francisco as part of our Fireside Chat series.
Eckert’s report, Living in a World of Unicorns, examines the role that venture capital has played in not just funding, but in actually helping transform a variety of industries – including fintech and financial services. Some of her key takeaways as they relate to fintech specifically include:
“Tech is now influencing so many verticals that the investments and business processes in those verticals are evolving and beginning to blur industry lines.”
“In the U.S., companies are mostly using AI to improve performance, gain greater insights from their data, or automate business operations. In China, AI companies are primarily focused on facial recognition and computer vision. Alarmingly, investment in cybersecurity hasn’t kept pace …”
“The growth of the platform economy and e-commerce created an unprecedented need for seamless, cross-border, highly scalable digital payments.”
“The digitization of the economy is also establishing the foundation and infrastructure for digital currencies to eventually go mainstream.”
“Today’s unicorns aren’t just shaping capital markets and investment strategies, they are shaping and redefining the industries in which they operate – by developing new products and services, expanding rapidly into new geographic markets, and using their cash (and valuable stock) to attract talent.”
Check out the report from PwC’s Vicki Huff Eckert, and then be sure to join us next week for our Fireside Chat at FinovateSpring in San Francisco, Friday morning, May 20th at 9:30am.
As we survey the damage from the pandemic and its multiple variants, technology services and consulting firm Accenture has some advice, “It is critical that every bank becomes a challenger.”
In a recent report, the firm uncovered that banking has moved from vulnerable to volatile on its Disruptability Index. Underlining this point, Accenture found that bank revenues declined in 2020, then rebounded last year. “Although COVID hasn’t been a solvency event for the banking industry, we have seen material profit compression that has reordered banks’ priorities,” the report states. “Leading institutions have witnessed double-digit net income declines of 7 percent in Asia-Pacific, 37 percent in North America, and 51 percent in Europe in 2020.”
This profit compression, along with an increased cost of risk and accelerated digital transformation, has resulted in what Accenture is calling a “neo-normal.” The more level playing field has resulted in a more crowded industry. Fortunately, Accenture leaves readers with four “imperatives for success” in this new, post-COVID arena.
Understand your market
While it has always been imperative for banks to understand their customer base, customers’ needs and wants have changed since the pandemic. For example, Global Banking Consumer Study found that when dealing with a bank, customers rank value as the number one priority. That’s up four slots from just two years ago when customers ranked it number five.
Also as a part of this, Accenture noted that banks must balance managing costs with customer acquisition. “Banks can no longer spend multiple years on complex integrations—they need to build a technical stack that can quickly onboard and migrate acquired portfolios and customers so the economic value of the acquisition can be realized swiftly,” the report said.
Future-proof your business
If this was important before the pandemic, it is even more so now. That’s because what we once thought was “the future” is here today. One of the best ways to do this may be cloud partnerships, Accenture explained, because the partnerships can accelerate digital transformation via partnerships.
Banks can’t take a blanket approach, however. There is no one-size-fits-all business model, especially for larger financial institutions. Instead, banks must adopt tailored models for each business sector in which they operate.
Focus on becoming digital
Accenture suggested that a mobile app is just a ticket to the game. Banks can’t rely on the app alone as their digital strategy. Instead of relying on their mobile app as their entire digital strategy, banks should shift their thinking outside of their budget. That is, digital tools shouldn’t be put in place just to decrease cost. Banks should also leverage digital to enhance differentiation, increase revenue, and boost customer acquisition.
Adopt technology
Simply put, “there is a high correlation between technology adoption and revenue growth.” That’s what Accenture found in two separate studies recently. Similar to the point above, banks shouldn’t just look to technology to decrease costs and increase efficiencies. Instead, in order to get ahead, banks need to consider how technology can enable growth, boost differentiation, and facilitate productive partnerships.
This is, of course, easier said than done, so Accenture suggests two jumping off points for banks. First, banks should improve their boards’ knowledge about technology. Second, banks need to align their IT strategy and their growth strategy.
These four tips are just highlights. There is a lot more to the full report, including graphs and many more stats. Check out Accenture’s brief and download the report.
Earlier this week we shared our conversation with IDology CEO Christina Luttrell on the challenges and opportunities in the digital identity verification space. This fall, IDology was honored at the 2021 Finovate Awards, winning recognition as “Best Identity Management Solution.”
A few weeks later, IDology released its 4th Annual Consumer Digital Identity Study. Surveying nearly 1,500 U.S. consumers over the summer of 2021, the study sought insight into what it called “the insecure, COVID-weary consumer.” How have preferences shifted in the balance between security and privacy on the one hand, and the willingness to share their personal information in order to access services that in many instances became especially valuable during the pandemic on the other? How have expectations grown as consumers’ reliance on new digitally delivered services has increased? And what steps can companies take in order to gain and keep valuable trust relationships with their customers?
These are just a handful of the questions addressed in IDology’s latest “heat check” on consumers and digital identity.
Finovate:IDology just published its 4th Consumer Study. What is the goal of this report and what can you tell us about your findings?
ChristinaLuttrell: This marks our fourth year publishing the Consumer Digital Identity Study to help businesses understand important shifts in consumer perceptions and preferences about fraud and identity verification. This year’s study showed us that, more and more, consumer trust hinges on the ability of businesses to safeguard identities and keep consumer data private, particularly during online account opening and onboarding.
Needless to say, consumers today have experienced seismic shifts in how they live and work, becoming increasingly reliant on all things digital. When we conducted this survey, the COVID-19 pandemic was entering its 16th month and the Delta variant accounted for the lion’s share of new infections. The results of our survey show a weariness that only a once-in-a-lifetime global pandemic can create and, with the emergence of variants such as Omicron, the potential for more uncertainty.
Customer fatigue has undoubtedly impacted consumer practices and preferences relative to the security of their identities, particularly their willingness to hand over personal information. We also observed a growing need for trust-based online relationships, which was evident in the level of protection consumers expect companies to put in place to safeguard their data and ensure privacy.
This report pays close attention to how consumers view the threat of fraud and the never-ending waves of cyber breaches. We also spotlight consumer expectations regarding privacy, why they do not trust businesses to be good stewards of their data, and what can be done to foster trust, especially during the online account opening and onboarding experiences.
From our vantage point, this survey shows that the intersection of fraud, trust, privacy, compliance, and new customer engagement continues to grow in its significance. Consequently, excelling in today’s environment requires embedding identity verification at the center of every digital interaction.
The safety and security of the mobile channel are of critical importance to consumers and companies alike. Twenty-four percent of consumers report that their mobile devices have been compromised since the pandemic began. Consumer concern about smartphone malware attacks has increased 34% year-over-year, and nearly half believe their mobile device is more vulnerable than their personal computer.
Consumers expect more identity fraud. Ninety-six million Americans expect the number of fraud attempts involving their identity or accounts they own to increase over the next 12 months. Amid the rise in unauthorized account openings, 61% are concerned their personal information will be used by criminals to open a new financial account. At the same time, many Americans appear ill-prepared to protect their data. Only 45% believe they have the wherewithal to defend themselves against cyber-attacks and fraud.
Trust in companies to responsibly use consumer data is on the decline. Seventy percent suspect that companies gather data without their permission, and 59% don’t think companies do enough to safeguard the Personal Identifiable Information (PII) they possess. This raises significant worries for consumers, with 53% very or extremely concerned with the practice, which explains why 90% support legislation similar to the California Consumer Privacy Act (CCPA) in their states or at the federal level.
A well-respected industry thought leader, Christina Luttrell was recognized in 2018 by One World Identity as a top 100 influencer in identity verification. She has been named one of the leading women in security by Security Magazine and in 2019 was selected as one of Atlanta’s “Women Who Mean Business” by the Atlanta Business Chronicle. In 2021 she was recognized by Global InfoSec Awards as a top “Woman in Cybersecurity.” Under Luttrell’s leadership, IDology has experienced dramatic growth.
Open finance network Plaid commissioned a survey from Harris Poll earlier this year to provide insights and analysis on fintech’s consumer impact in the U.S. and U.K. This fall, Plaid published a report based on the survey that detailed three overarching conclusions about the state of fintech.
Here’s a look at each of the findings below, along with what they mean for banks and fintechs in 2022.
Users’ switch to digital is permanent
Plaid’s survey found that for about half of the respondents using technology to manage finances is a habit. In fact, 58% said that they, “can’t live without using technology to manage their finances.”
Additionally, almost 70% of survey respondents said they use technology “as much as possible” to manage their money due to the pandemic. And it appears that this trend isn’t isolated to pandemic times. The study found that between 80% and 90% of respondents who used fintech in the past year plan to use it the same amount or more in the future.
Fintech spans demographics
According to the answers from respondents in Plaid’s survey, fintech is helping to level the playing field of financial management. Respondents across racial lines and generational divides are turning to technology to help them not only manage their finances, but also get further ahead.
For example, 37% of Black respondents and 31% of Hispanic respondents use online-only banking services to minimize fees they may incur with accounts. Additionally, 32% of Hispanic respondents use earned wage access tools to receive their pay early and avoid payday loans. In addition to offering access to tools, fintech also enhances financial education. Plaid’s study found that 28% of Black respondents and 24% of Hispanic respondents didn’t track their credit scores at all before they started using fintech.
The survey indicated that the youngest generation surveyed (Gen Z) and the oldest generation surveyed (Baby Boomers) have been the most impacted by fintech. More than 70% of Gen Z respondents said that fintech helps them build better financial habits. When it comes to Baby Boomers, almost 70% of them reported that they feel confident using technology to manage their finances. This figure is up 16% from the year prior.
Fintech is becoming part of every day life
Perhaps the most noteworthy statistic in Plaid’s survey is that almost half (48%) of Americans use fintech on a daily basis. This figure is up 30% from the year prior, when 37% of respondents said they use it daily.
Interestingly, the survey indicates that this usage is more heavily weighted toward positive aspects of financial management, such as budgeting and investing, versus negative ones, such as billpay. In its analysis, Plaid suggests this is because the negative aspects are often automated.
In its conclusion, Plaid indicates that fintech is no longer separate from traditional financial institutions. Rather, because of embedded finance, fintech is simply the new way of conducting finances digitally.
Looking ahead
What do these shifts mean for banks and fintechs in 2022? In short, they indicate that there’s no going back on the road to digital. Even some of the most reluctant user groups have switched to digital and their usage is only increasing. The findings also indicate that the sector is poised for even more growth. The increase in demand, combined with new capabilities brought forth by enabling technologies, ultimately means that there will be new opportunities to serve users in new ways in the years to come.
FinovateAsia 2021 is over. But we’re keeping the doors open and the lights on for a few more days to let those of you who attended our digital fintech conference last month to check out any of the keynote addresses and panel discussions that you might have missed. The platform will remain available to FinovateAsia 2021 attendees until July 6th.
One of the hot topics in Asia – like in the rest of the world – is the rise of artificial intelligence, or AI, and its potential impact on fintech and financial services. At FinovateAsia this year, DreamQuark’s Mikko Hietanen and David Destemberg led a virtual meeting on how to use AI in order to help customer to select ESG investments. Among our demoing companies, Singapore-based Crayon Data demonstrated its AI-led platform, maya.ai, that enables enterprises to create highly personalized experiences for their customers.
The latest Big Read on AI in financial services in Asia comes from TechWireAsia, which reviewed a report from McKinsey titled AI in banking: Can banks meet the challenge? as a way of opening up the discussion. The TechWireAsia overview has been making the rounds throughout the fintech Twitterverse, and its support of McKinsey’s conclusions – that banks, including those in the Asia-Pacific, need to be wary of competition from digital challengers that may be quicker to embrace AI – reminds us of how big the stakes are for traditional financial services providers.
Importantly, innovations in AI are not limited to front- or customer-facing solutions. In fact, in Southeast Asia – countries like the Philippines, Indonesia, Malaysia, and Singapore – some of the biggest gains for AI technology deployment have been in backend operations. This is an area where banks can experiment and test new, AI-powered, solutions – and even develop a more AI-friendly culture, if necessary – before attempting to deploy more customer-facing, (and potentially brand-impacting) AI-based technologies.
That said, as far as the McKinsey report is concerned, for those financial institutions that do pursue what the report calls an “AI-bank” strategy, the rewards could be huge. McKinsey estimates that AI “can potentially unlock $1 trillion of incremental value for banks, annually.” This value is represented in more than 25 different AI use cases capable of helping banks grow revenues, lower costs, and “uncover new and previously unrealized opportunities” due to an AI-given ability to generate key customer insights from massive volumes of data.
And while offering much in the way of a carrot for banks to move carefully and quickly to adopt AI-based technologies, the McKinsey report does wield a stick, as well. “Banks that fail to make AI central to their core strategy and operations,” the report reads, “will risk being overtaken by competition and deserted by their customers.” The report highlights four key trends – rising customer expectations, the accelerating pace of AI adoption by financial institutions, the challenge of digital ecosystems, and competition from Big Tech – that are most likely to compel banks and financial services companies to act.
With new vaccines helping stoke confidence in a post-COVID summer, if not spring, what has the pandemic – and the work-from-anywhere movement it accelerated – revealed about the security of our increasingly digital world?
What is the biggest takeaway from your report on fraud?
Christina Luttrell: As COVID-19 drove 84 million Americans online for services that were previously carried out in person, businesses faced an influx of new customers to onboard. In response, many appeared to loosen fraud controls in an effort to reduce friction and simplify onboarding, particularly for digital “newbies.”
With this loosening, combined with COVID-19 factors such as dispersed fraud teams, remote work, stimulus checks, and sophisticated phishing and synthetic identity fraud (SIF) schemes, it’s easy to understand why fraud attempts surged to a four-year high. Also not surprising is the emergence of mobile as the most targeted channel, evidenced by an astounding 89% increase in fraud attempts likely due to an increased reliance on mobile devices during the pandemic.
In the report each year, we’ve seen businesses struggle with the challenge of balancing fraud with customer friction. Businesses drive revenue by greenlighting customers, which includes removing barriers and minimizing effort during the onboarding process to avoid unnecessary “friction.” Yet they must do so while deterring fraud. This challenge is exacerbated by current events and the state of fraud and, as a result, verification of identities was cited as the top challenge to fraud deterrence among businesses. Many have come to the conclusion that, at its core, fraud is an identity problem and 86% firmly view digital identity verification is a strategic differentiator across all industries.
When it comes to the future, 79% of businesses expect fraud to increase in 2021. With the COVID-induced shift to digital, fresh collection of more Personally Identifiable Information (PII) from 2020 and potential economic conditions, this is likely to be a “bust out” year for fraud.
How quickly have fraudsters followed the migration to digital channels during the COVID-19 crisis?
Luttrell: From our study, The COVID-19 Effect on Identity, Fraud and Customer Onboarding, we know that between March and July of 2020, 37% of Americans online activated an online service that was done offline prior and 46% said they have used their smartphone more often to sign up or apply for a new service. As a result, one-third of businesses experienced a customer shift of 50% or more to digital channels. In 2020, the number of new accounts opened with a mobile phone increased 43%. Fraudsters tend to follow the masses and the money and, in 2020, as those consumers went digital, criminals were quick to follow, employing rapidly shifting tactics, which was reported as a top challenge to fraud deterrence for 40% of businesses.
Mobile fraud attempts surged 89% in 2020 with increases across all fraud types, from spoofing and cloning to porting. With more consumers relying on digital information sources and businesses sending a higher number of customer communications, 56% of businesses reported phishing attacks as one of the most prevalent forms of fraud in their industries.
The pandemic provided a prime opportunity for fraudsters to take advantage of distracted Americans, the increase in digital communication between businesses and consumers and government relief efforts. Our research shows that 84 million Americans reported experiencing a phishing attack attempt in the months following the pandemic’s start, with an average of four attempts per person between March and June.
How have cybersecurity professionals effectively responded to this shift?
Luttrell: It appears cybersecurity professionals responded rapidly to this shift as best they could, but COVID-related disruption and distraction, such as remote working and government relief checks, put a wrinkle in plans and added a new layer of complexity to fraud detection and the consumer experience. Fraud is an identity problem, making identity verification the essential “digital handshake” and element of establishing trust. We expect to see more companies rely on the orchestration of blanketed layers of identity attributes, artificial intelligence, and integrated verification methods to remove friction and deter fraud.
Successfully onboarding new customers and building long-term loyalty in today’s rapidly shifting fraud landscape will require businesses to act quickly. On the back end, they will need to understand how identity verification attributes are performing so they can make adjustments to attributes that pinpoint fraud on an extremely granular scale while streamlining the verification process for real customers.
What kinds of fraud are increasingly prevalent – especially compared to the pre-COVID-19 period?
Luttrell: Aside from COVID-related fraud, such as vaccination schemes, the fundamental methods of remain relatively unchanged. Instead, the shift has occurred in the sophistication and amount of fraud which, as I mentioned, is rising across the board compared to pre-COVID numbers.
Credit, debit, and prepaid fraud were reported as the most prevalent by 63% of businesses, followed by phishing, account takeover, ACH/wire and first-person fraud. ACH/wire fraud spiked by 15% – presumably because of rising P2P usage due to social distancing and first-party, specifically “friendly or know fraud,” increased 28%. This may be attributable to chargeback fraud schemes as many Americans were unemployed, underemployed or suffering in shape or form financially, thereby increasing their pressure and rationalization of committing fraud.
Your report mentions the issue of synthetic fraud in the PPP lending program as specific challenge. Can you elaborate on this problem and what should be done?
Luttrell: A range of fraud schemes were used to exploit PPP in 2020, one of the most concerning being synthetic identity fraud (SIF). According to McKinsey, this is the fastest growing type of financial crime in the U.S. A recent report by Aite Group revealed that among 47 financial institutions surveyed, 25% experienced an increase of 10% or more since the start of the pandemic. Our own research also underscores the SIF problem, which hit an all-time high, with a 43% increase in SIF reported by respondents to the IDology Fraud Report.
SIF continues to trouble businesses, especially given the challenges associated with decentralized fraud teams working from home and the need to interpret and apply once-in-a-lifetime changes in consumer behavior and the swings and noise they create. There are also the problems created by the never-ending stream of data breaches, and the use of personally identifiable information gathered from phishing attempts and other scams that continue to thrive in the COVID era.
To quickly issue PPP loans and prevent fraud, lenders should reconsider the importance of Know Your Customer (KYC) measures. Placing a focus on strong KYC is not only best business practice, it also will help lenders prevent fraud and maintain integrity. To easily and securely ensure a borrower is who they claim to be and provide a smooth experience while battling fraud, such as SIF, the identity verification process supporting KYC should include multiple layers, control of the entire identity verification process and the flexibility to make and automatically deploy configuration changes and machine complimented with human intelligence.
How would you characterize the business world’s response to these new threats, especially in financial services?
Luttrell: The business world, as a whole, responded admirably. Consider the massive logistical shifts that needed to happen in months, if not weeks, from the mass migration of working from home to customer engagement and the shift toward digital. On a human scale, it’s a breathless achievement. Eighty-seven percent of businesses feel their organization is equipped to some degree to make the necessary changes to stay ahead of rapid digitization and COVID-19 fraud trends, indicating they recognize and perhaps, have a higher than expected sense of confidence.
Although two-thirds of Americans feel companies could be doing more to protect their identities, confidence in organizations being able to protect their data actually increased in comparison to pre-COVID-19 levels. Our data shows that financial services organizations are stepping up, forecasting larger anti-fraud investments and budgets for 2021, and leaning into a multi-layered approach to identity proofing as well as using diverse sources and types of data. Eighty percent of financial institutions expect to increase budgets on fraud deterrence in 2021, with 45% saying significantly, more so than any other industry. Though the investment varies by sub-sectors such as fintech, lenders and prepaid, prepaid firms appear to be most aggressive.
How do you think the post-COVID cybersecurity landscape will differ from the pre-COVID cybersecurity landscape?
Luttrell: The cat and mouse saga continues and the chase maze has become significantly more complicated. The lesson for many, in hindsight, is that strong, thoughtful and comprehensive digital identity verification is mission-critical. The digital handshake is essential in establishing trust.
Fraud knows no borders and the world is small and inter-related, as is identity verification. Address verification as part of identities is not only critical for accurate verification, but also for the delivery of essential items and resources. Americans have migrated much of their lives to digital, forever.
Identity collaboration between businesses and with customers will be more sought after, and technology, such as artificial intelligence, will need to be supplemented with high-touch layers of human intuition, proactive detection, fraud expertise, and consortium intelligence from other organizations. This is especially important as COVID introduces novel fraud schemes that can fool pre-COVID identity proofing methodologies. As was the case with major events in the past, the outcomes and unintended consequences of the pandemic are unknown but we know that fraudsters are harvesting data, scheming, probing new defenses, partnering with nation states and utilizing artificial intelligence to scale fraud on a global basis.
What are the biggest fraud challenges to emerge during the COVID-19 era? According to a new report from Feedzai, card cloning tops the list of major indicators for fraud in both financial services and e-commerce.
With card cloning, criminals copy stolen credit or debit card information and transfer it to a new card. Also known as “skimming,” card cloning is a big business on the dark web, where fraudsters – “carders” – buy and sell stolen payment card data.
But card cloning is not the only danger highlighted in the report. High speed ordering with bot attacks that move quickly and can last for hours is another fraud threat in financial services, as is what Feedzai refers to as “High risk merchant category code (MCC).” Businesses that earn this designation from their bank are typically those with above average chargebacks, as well as a higher risk of fraud potential.
Within ecommerce, the report found that in addition to card cloning, both account takeover (ATO) and suspicious email are among the top three indicators for fraud. With an ATO attack, the criminal uses bots to access an unsuspecting individual’s bank or e-commerce account. This enables a bad actor to access that account and make fraudulent and unauthorized transactions from it. Suspicious email is a broader category that includes common but effective tactics like phishing, and as well as fake emails and email domains.
“It wasn’t just consumers who met the call to digitally transform,” Feedzai’s Quarterly Financial Crime Report reads. “Fraudsters, ever technologically savvy and opportunistic, made the most of the shift.”
Feedzai’s report on financial crime puts current trends in the context of a society that is embracing digital channels at a rapid pace. It notes significant increases in the dollar amounts and value, as well as the number of ecommerce transactions processed between May and September of 2020 compared to the same period last year. Unfortunately, the report also noted a dramatic increase in network fraud this year. “The realignment of holiday shopping trends was also an early gift for fraudsters,” the report reads.
What can financial institutions do to help fight financial crime?
Monitor Card Behavior: Multiple transactions in a short period of time, unusually high dollar amounts per transaction, and a sizable number of merchant codes within a relatively short period time are all potentially indicative of payment card fraud. Leveraging machine learning and AI-powered algorithms to accurately identify these patterns is an optimal way for businesses to keep up pace with the speed and complexity of this kind of fraud.
Track Suspicious Email Domains: High-risk domains, invalid emails, and unconfirmed email addresses are all potential sources of fraudulent activity. Companies can use both software and the services of security specialists who maintain up-to-date information on domains and email addresses that may be used by fraudsters.
Know Your Customer: Knowing what “normal” looks like is the first step to identifying abnormal behavior. By developing an accurate customer profile that takes into account such factors as a customer’s typical log-in times, devices, and time spent on different platforms, businesses can more readily spot behavior that is exceptional, and take further steps to determine whether or not that fraudulent activity is taking place. Feedzai refers to these as “hypergranular risk profiles.”
“COVID has created a big disruption in the banking, payments, and e-commerce sectors with multiple impacts all over the world,” Feedzai Senior Director of Global Data Science Jaime Ferreira said. “Feedzai is in a good position to add clarity to this debate and help financial institutions to understand these complex shifts and how to better protect their customers.”
Feedzai’s Quarterly Financial Crime Report for Q4 2020 leverages Feedzai’s data from more than four billion global transactions from March 20 through September of this year. The report also features information from consumer research surveys of “nearly 2,200 account-holding U.S. consumers.”
The latest report from fintech enablement platform Hydrogen, which made its Finovate debut in 2018, takes a look at how the global public health crisis has accelerated the rise of payments-as-a-service. But it’s not just COVID-19; enabling technologies like blockchain and AI are helping play a major role in making PaaS a key space for both fintech disruptors and payment incumbents.
“While cash is still the leading form of payment at the point of sale, accounting for about 77% of all payments worldwide,” the report noted in its Executive Summary, “non-cash payment options such as e-wallets are gaining popularity, and the number of people using mobile payment apps in-store is forecasted to surpass one billion for the first time in 2020.”
Hydrogen’s report provides an overview of the PaaS market, how fintechs are driving innovation in the space, critical payment trends that will be accelerated by PaaS, and what industry experts and analysts are saying about the challenges they’ve overcome when innovating in the payments space and what they expect to see in payments over the balance of 2020 and beyond.
Access Hydrogen’s report on the rise of Payments-as-a-Service.
“Payments enablement platforms will be the bridge between the legacy cash infrastructure of yesterday, and the digital systems of tomorrow,” the report observed. Putting companies like Hydrogen at the center of this effort, the report anticipated that “this will create more competition, thus lowering costs for small and medium sized businesses (SMBs) and merchants, that can be passed onto consumers.”
Hydrogen helps developers build complex fintech applications quickly and with a single integrated platform. The company’s solution offers a suite of REST APIs to support custom app development and a no code environment to enable developers to configure white label apps without any coding required. Founded in 2017 by Michael and Matthew Kane, Hydrogen is headquartered in New York City.
Earlier this month, Hydrogen announced that it was teaming up with fellow Finovate alum IDology to help businesses run KYC checks on their end users. In April, the company announced that it was integrating with Amazon Web Services’ Key Management Service, having made a similar move with Azure’s KMS a few weeks before. Other partnerships forged by Hydrgen this year include collaborations with Tink, Salt Edge, and Zillow.
Driven by the preferences of millennial consumers, the fintech industry is expected to generate revenues of $500 billion in ten years based on research just published by UBS. This represents a growth of more than 3x over the $150 billion in revenues the industry generated in 2018, and shows fintech outpacing the revenue growth expectations of the overall financial sector.
The projections from UBS rely on more than just millennials – who represent 27% of the world’s population and own an estimated $24 trillion in wealth. The UBS report also suggested that blockchain technology will generate economic value of between $300 and $400 billion in multiple industries, with fintech and financial services being the biggest beneficiaries. In addition to automation, blockchain and distributed ledger technologies were recognized as playing key roles in enhancing areas ranging from trade finance and compliance to foreign exchange and insurance.
AI also will play a role in generating significant economic value for the fintech industry over the next decade, according to UBS. In addition to enhancing processes in fields like roboadvisory, insurance, and compliance, AI will help develop a growing array of ever-more-sophisticated, customer-facing applications such as virtual assistants and chatbots. Increased consumer interaction with these AI-enabled technologies could drive a customer experience/innovation loop that would keep adoption rates of these kinds of solutions high and growing. UBS featured data from its Semi-annual Cognitive/Artificial Intelligence Systems Spending Guide (in collaboration with IDC) which indicated that spending on AI technology worldwide this year would reach $47 billion. Ten years ago, that spending total was less than a quarter of that amount at $11 billion.
The report also underscored the growth of the e-wallet industry, particularly in the Asia-Pacific region where the area’s millennials have helped create a 66% penetration rate for the technology. This is double the rate in North America and an even more significant margin over trends in EMEA. Other areas in fintech highlighted in the UBS report were payments, insurtech, wealthtech, capital markets tech, and online lending.
Positive moves from regulators were cited as one of the more surprising sources of optimism for fintech revenues over the next ten years. The reasons vary widely, but include the public-private partnerships that characterize fintech development in the MENA regions, as well as pro-consumer compliance laws in Europe, the U.K, and North America that are driving innovation in often overlooked subsectors of fintech like regulatory technology (“regtech”). The rise of open banking and the proliferation of neo- and challenger banks are also ways that governments have and are likely to continue to create space for growth in fintech.
