Fintech Solutions in the Age of Digital Fraud


With fintech solutions, apps, and services popping up everywhere, their convenience has led to concerns about security and privacy. Not every banking and fintech app is used for the same purpose, and the data — and funds — held in one app are most likely not identical to another. 

However, it’s important to have a look at various fintech solutions and how they handle privacy, especially in an age of fraud.

The Role of Fintechs

Fintech is a broad term used to refer to financial technology or technology used for the development, provision, and delivery of financial services. These financial services can be for consumers or for businesses and can be used in a wide variety of applications, from bill pay, money transfer, investments, and more.

Initially, fintech referred to technology that was applied to the back-end systems of banks or other financial institutions, according to TheStreet but has since grown to encompass a plethora of other applications. Technologies include those related to both software and hardware to facilitate financial services, and can be device-based or delivered via cloud-based solutions. 

Types of Fintechs

The categories of fintechs continue to expand, as new products and services enter the marketplace to reduce the friction often found in more traditional financial services. Fintech categories generally include the following:

  • Lending: The issuing of loans, such as mortgages or auto loans, or credit cards
  • Payments: The sending of payments directly to friends and family, or the ability for small businesses to receive and pay invoices
  • Cryptocurrency: Buying, trading, and storing Bitcoin and other cryptocurrencies
  • Financial planning: Creating retirement and investment accounts that use machine learning and AI to manage assets based on the investor’s pre-defined goals

Fintechs vs. Banks

These two aren’t necessarily sworn enemies—in fact, banks have been using some form of financial technology for decades. However, when it comes to banking services, it’s important to note some important differences.

A “fintech-only” bank, perhaps known as a challenger bank or neobank (see below), is one offering very similar products as that of larger, more traditional banks, except that there are no branch offices. Such fintech banks appeal to digital- or mobile-first consumers who do not need live, in-person interactions and are comfortable engaging with an app. 

Fintechs might not be a bank but might offer select services of a more traditional bank, such as insurance products, bill payment, or cryptocurrency trading. These vertical fintechs also serve to challenge traditional banks, as customers who migrate to them might be attracted to additional products as these fintechs mature and expand their offerings.

At issue for these fintechs is digital customer onboarding, or the account opening process that requires identity and asset verification, as oftentimes funds from other banks must be loaded into the fintech app in order for the customer to begin interacting with the app or platform. Customer onboarding for a fintech company is quite different from that for a traditional bank or lender, where the customer simply shows up at the branch office and opens an account in person. 

Fintech Trends

Financial services continue to expand their influence over our digital lives. Let’s have a look at some of these fintech trends and how we currently engage with them on a regular basis. 

  1. Peer-to-Peer Payments and Money Transfer

Peer-to-peer payment apps allow individuals to send money to one another, instantly and without fees. First popularized by PayPal, Venmo, Zelle, CashApp, and a host of other such peer-to-peer payment apps enable frictionless money transfer.

Not all of these apps have lending capabilities; however, onboarding still requires verification and ownership of accounts that the customer intends to use to fund transactions.

   2. Digital Customer Onboarding

Fintechs are now tasked with onboarding customers completely digitally. This means that ID verification, biometrics, and artificial intelligence are crucial to the success of fintechs in bringing on new customers.

   3. Cryptocurrency Wallets and Exchanges

The surge in interest in cryptocurrency has led to a parallel interest in the wallet and exchange apps through which crypto users store and trade their digital currencies. Bitcoin and other cryptocurrencies currently cannot be stored in traditional checking and savings accounts, and as such, crypto-asset owners need vehicles through which they can access their crypto when needed.

The rising price of Bitcoin means that the aggregate value of cryptocurrency stored in these online wallets and exchanges would make for ripe targets for cybercriminals. Further, as cryptocurrency is a bearer asset, meaning that whoever holds the private key is the rightful owner, criminals are even further encouraged to breach a wallet or exchange app.

Security has increased, especially for larger exchanges like Coinbase, that are seen as bellwether services for the still-nascent industry. Many enforce multi-factor authentication, in which the user will need to provide a password and one other modality (biometrics, temporary PIN) in order to gain access.

   4. Robo-Advisors and Asset Management

Why pay a financial advisor when AI can do the job — and sometimes a better one at that — than a human? Betterment, WealthFront, SoFi, and others promise investors returns on their portfolios without the hassle of dealing with an adviser, even if that adviser is only fee-based and not paid on commission. AI is based on algorithms, which are models based on data, which sounds attractive to younger investors convinced that AI and machine learning can manage money better than a human can.

Of course, these portfolios need to be funded with money from a traditional bank account, so onboarding requires authentication and proof of ownership of those connected bank accounts. As with more traditional portfolio management companies like Fidelity and Vanguard, robo-advisors also encourage users to auto-fund their accounts on a regular basis. As such, password changes or re-authentication may be needed from time to time, as per the rules of the app.

   5. Challenger Banks and Neobanks

These are non-traditional banks that have been created with the sole purpose of taking business away from larger, incumbent banks. To do this, they usually offer very attractive terms on loans, or unusual benefits, such as a high percentage of cash back on a credit card. Such firms are also usually able to offer higher rates because many of them lack brick-and-mortar branches through which customers can engage with a banker.

Expecting a surge of new customers, these challenger banks need to work hard to ensure that new customers with good intentions are indeed who they say they are. Challenger banks and neobanks offering too-good-to-be-true banking rates are known to attract cybercriminals, who believe that because these banks and services are startups, they will not have the cybersecurity measures in place to validate identity and authenticate users.

Fintech Challenges

Perhaps the biggest challenge for fintech companies, or the fintech embedded in more traditional banking processes, is adoption. Will customers find value in the technologies and continue to use them? Will they feel secure when onboarding into a digital system?

If customers abandon an app, or simply fail to use particular fintech features of a banking or lending platform, it can mean losses for the fintech company or bank—the costs and hours of development needed to launch the technology would be wasted.

On an industry level, fintech challenges can run deeper. While technology promises efficiencies and cost savings, certain fintech solutions that incorporate machine learning or AI can have biases or errors embedded in their applications which can have negative consequences. For example, such errors could prevent certain groups of individuals from access to financial products that they need, requiring the intervention of human managers who may not be able to address the issue.

Additionally, fintechs are known to attract cybercriminals. Convinced that such new firms lack anti-fraud measures, or depositors insurance to protect their customers' assets, criminals breach fintech companies in hopes of compromising the accounts of existing customers or to create fraudulent accounts in hopes of opening accounts or credit lines in order to extract funds without repaying. A strong digital customer onboarding system is the first defense against criminal activity in a fintech company.

Fintech Cryptocurrency Regulations

Traditional Know Your Customer (KYC) or Anti-Money Laundering (AML) procedures at banks normally double-check to verify that the applicant has not previously been engaged in criminal activities, such as money laundering, drug trafficking, or terrorism. 

Indeed, the rise of cryptocurrency—which can be considered a fintech in and of itself—has increased the need for financial institutions of all sizes to verify the identities and more importantly, the intent, of their new customers. This is because cryptocurrency is a bearer asset: whoever holds the private key is the owner. This makes the theft of crypto-assets all the more attractive to criminals.

Systems can be put in place, starting with customer onboarding, not only to verify the names and addresses of new applicants but also to understand any anomalies in past banking behaviors and credit decisions. 

Opportunities for Growth in Customer Onboarding

Fintech apps most likely do not have the resources to handle customer onboarding. Without brick and mortar branches, and with a surging volume of new potential customers gained via mobile apps, they need a way to verify identity at scale without causing friction and app abandonment.

Yet, customer onboarding represents a tremendous opportunity for fintechs. Done correctly, onboarding delivers top-line revenue, as the more customers that can get onboarded seamlessly, the faster those customers can engage with the firm’s products and the faster the firm can begin to generate revenue from those products, such as monthly account fees or interest on loan products.

Customer onboarding also has the opportunity to save a firm from losses stemming from fraud. The process provides a firm with the ability to prevent a fraudster from gaining access to a firm’s assets, whether to compromise the accounts of others or to create new fraudulent accounts that take out loans with no intention of paying them back.

Instnt is the first fully managed digital customer onboarding solution for businesses with up to $100MM annually in fraud loss insurance. See how we can help your fintech company safely onboard good customers today!


About the Author

Instnt's fraud loss indemnification technology provides coverage of up to $100M for fraud losses stemming from synthetic, third-party, and first-party fraud. With Instnt's comprehensive fraud loss protection, businesses can confidently extend their services to a wider customer base, enabling them to embrace more opportunities and enhance revenue streams while maintaining a secure, fraud-free environment.