Tamas Kadar is the CEO and co-founder of SEON.
While parts of the broader fintech ecosystem have faced difficulties over the past few years, the neobanking segment has continued to grow. In fact, Statista says the market is projected to reach a total transaction value of $2.6 trillion by 2027.
This fast growth has presented its own challenges; in particular, it’s left neobanks open to fraud, as highlighted in our report Neobanking Index: The State of Neobanks in 2023. If not managed effectively, this threat has the potential to cause significant monetary and reputational loss to the sector.
Could Fraud Derail Neobanking Growth?
Fraud and financial crime are on the rise, and they’re growing particularly quickly online. In the U.K., over £1.2 billion was stolen through fraud in 2022, with nearly 80% of authorized push payment (APP) fraud cases starting online. U.S. consumers lost more than $8.8 billion to fraud in 2022, which represented a 30% increase from the year before.
Neobanks are facing additional scrutiny amid this rise. As identified in our report, fraudsters are attacking with an array of different techniques, including account takeover fraud, account opening fraud, identity theft and money laundering. Regulators, customers and shareholders expect neobanks to fortify their operations—and fast.
Improving Defenses
Neobanks must get better at blocking fraud before it happens, but this puts them in a double bind. Neobanks heavily emphasize their comparative speed of sign-up when marketing their services against traditional financial institutions, and it’s their frictionless customer onboarding that sets them apart from these rival legacy banks. While added scrutiny during customer onboarding will filter out fraudsters, it could also chip away at this competitive edge.
Retaining Advantages
Know your customer (KYC) checks help neobanks know exactly who they are welcoming as a customer, verifying not only their identity but their trustworthiness. There are many different levels of KYC protocols, and it’s up to each business to determine how extensive they would like their KYC practices to be—and whether to expand them beyond onboarding into continued customer due diligence (CDD).
KYC checks can be done internally or externally depending on how automated the process is. Either way, KYC protocols are often necessary and are legally required in many countries. Automation can speed up the checks, but other efforts can start before KYC. These pre-fraud checks use the customer’s digital profile to determine whether they are who they say they are and define a level of risk against each customer.
Determining how much risk a new customer poses at the time of sign-up can be an effective method for stopping fraud before it starts. These checks flag fraud risk early, so while KYC checks may still be needed, there may be a smaller pool of customers who must pass through them. KYC checks can be more expensive than pre-fraud checks, so this approach could be worth considering for some businesses. Thankfully, pre-fraud checks can be carried out in seconds—meaning neobanks retain their reputation for both safe banking and quick, frictionless onboarding.
Continuous Innovation
Neobanks must continuously evolve and enhance their fraud prevention measures to outpace emerging threats. Effective fraud prevention involves a combination of best practices and a deep understanding of potential obstacles—including how fraudsters change their methods of attack. Where there is money and growth, there is fraud—which is why this promising industry is so heavily under attack. With the right insight and tech stack, neobanks can put a stop to fraud before it happens.
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