Digital Banking Fraud Detection Explained for Risk Executives;

As a chief risk officer in a digital bank, you are often at an inflection point. 

You have to fight against complex, ever-changing fraud attacks while retaining the key advantage of your digital bank – seamless customer experience. 

Fortunately, you’re in the right place. In this article, you’ll see effective ways to detect and prevent digital banking fraud without causing friction or false positives.

Add SEON to the mix, and you could also share results similar to Rick, who is a senior fraud manager:

Rick Senior Fraud Manager
[SEON’s review on G2

What Are the Typical Digital Banking Fraud Scenarios?

Although not many foresaw the industry’s growth when early entrants like Moven and Chime launched in 2007, digital banks have come a long way. This sector alone is now expected to hit $395 billion by 2026. 

All thanks to their fast onboarding and complaint resolution processes. 

Unfortunately, all that success isn’t unnoticed by fraudsters, who constantly try to exploit those swift processes by launching attacks. 

Some scenarios you should look out for include:

Account Opening Fraud

This entails fraudsters opening new accounts by either impersonating legitimate customers or using stolen (or synthetic) identities to obtain credit. 

Paypal is a major victim of account opening and onboarding fraud. In 2021, the company identified over 4.5 million fake accounts, which directly resulted from their incentivized customer acquisition strategy.

PayPal offered $5 or $10 to customers who signed up for PayPal or Venmo, automatically attracting fraudsters who used large-scale bot networks to visit the registration site. 

It’s important to note that Paypal isn’t a neobank, but an e-wallet provider. But with neobank accounts holding more value than e-wallets, Paypal’s example highlights the extent of vulnerabilities neobanks might be exposed to. 

Account Takeovers (ATOs)

Sometimes, bad actors dupe your company by leveraging phishing and hacking to access users’ accounts. Once in the account, the scammer can spend the money within, change the credentials to lock the legitimate user out, or put the credentials up for sale on the dark web. 

Account takeovers pose a significant risk to your digital bank. According to the Aberdeen Group, 84% of fintech companies experienced account takeovers in 2021, costing up to 8.3% of their annual revenue. 

Fraudulent Fund Transfers

This occurs whenever fraudsters use an emulator or app cloners to make a bank transfer or top up an account. This digital bank fraud scenario is often done to launder money

Additionally, there are cases where a scammer will open a legitimate-looking account to receive deposits for promised service or product they’ll never deliver. 

Take the attack scenarios above seriously, as they can plague your company’s fraud prevention program. It’s also crucial to note that fraudsters are adapting by the day. 

Whenever they notice their actions are blocked, they will try another method. 

One way to not just detect but fight these illegal activities is by implementing a real-time, fraud detection and prevention solution like SEON. Doing this will give you peace of mind, knowing fraudsters are always in check. 

Take Jeff, a fraud analyst and SEON customer, for instance: 

Jeff Fraud Analyst

4 Ways to Prevent Digital Banking Fraud 

While fraudsters are getting smarter with their techniques, you can keep them in check by following these recommendations below: 

1. Watch for Internal Fraud 

Charity, they say, begins at home. And so, if you must fight fraud effectively, start by screening and auditing your company’s employees.

Who knows? 

Some of your supposed “trusted” employees might be selling customers’ account details and PIN codes on the dark web. You should take this seriously, as Microsoft research shows that groups like LAPSUS$, a growing cybercrime group, are increasingly gaining access to target organizations through recruited employees in return for money.

With research indicating that 70% of banking fraud is successful because of insiders, monitoring internal fraud should be a top priority. 

2. Educate Your Customers 

Making customers aware of the risks they face, what to look out for, and safe transaction tips is a sure way to reduce fraud risks like ATOs. Even more so, this strategy makes your customers trust your bank more.

You can take inspiration from Monzo’s campaigns warning customers about takeover attempts. 

Reporting on the campaign, David Snelling wrote: 

“Monzo has issued a warning to all customers about fake text messages claiming to be from the popular financial service provider.”

Here’s the tweet thread they started to educate customers: 

Monzo Twitter Phishing

One thing to note from Monzo’s campaign is this: 

If you make efforts to educate customers, popular media companies could pick up the news, leading to free publicity, more awareness and trust for your digital bank.

3. Use Real-Time Data Enrichment Tools

As the name should suggest, real-time data enrichment enhances customers’ KYC data with aggregated extra data obtained from various sources such as open-source databases, digital services, and social networks. 

This is helpful in fraud detection as it gives you additional information to make better-informed risk decisions. Additionally, it allows you to get a bigger picture of your users without asking them to submit details. 

As a result, you can fight fraud without sacrificing frictionless customer experience. You can even use these alternative digital signals for credit scoring and underwriting. As noted in an article by The Fintech Times team:

“Customers should be able to be verified in seconds with seamless, automated identity proofing that provides a trust anchor from an ID, data point, biometric or other identifiers such as social media or alternative data- and one that can be built upon (layered) for initial and continuous identity proofing and risk management.”

However, not all tools will help you get the right datasets. 

But with SEON’s data enrichment modules, you get all the crucial datasets for preventing fraud, including:

Email Analysis Module 

Through deep social media profiling and domain verification, this digital footprinting module helps you confirm an email address’s legitimacy by looking up 35+ online and social sites to find profiles connected to the email. It also reveals if the email address has been involved in blacklists and data breaches. 

You can look up an email manually, or integrate the Email API into your risk tech stack: 

Email Risk Score 4
[With a risk score of 4 and observations such as the email not existing on an email domain, you should scrutinize this user further as registering with a throwaway is not a good sign]

You can also batch-check multiple email addresses in one go through the user-friendly interface or via API calls:

batch-check multiple email addresses
[With these risk scores, you shouldn’t be worried about the legitimacy of the two users]

IP Analysis

Through the IP API, this module lets you know your user’s location and if the IP is on any spam blacklist. You can also use this module to determine datacenter IP or residential connection. 

All of these help reduce ATOs, spyware, malware, criminal netblocks, botnets, spammers and exploit scanners. 

Here’s how:

IP Analysis
[With a risk score of 0, it’s safe to say this user actually lives in Great Britain]

Device Fingerprinting

This module exposes suspicious configuration and activity on the device a customer used in connecting to your site. It helps you answer questions such as: 

  • “Has the user connected with this device previously?” 
  • “What kind of browser did the customer use?”  
  • “Is the user’s device a mobile or desktop?” 

SEON achieves this by generating specific hashes based on any of these collectible parameters:

Device Fingerprinting

4. Machine Learning

Although fraudsters can easily game data enrichment by entering fake information during KYC checks, SEON helps your team see through their gimmicks with whitebox algorithms. 

This algorithm learns your fraud patterns and retrains itself to improve accuracy, suggesting rules suitable to your operations and fraud landscape.

In addition to this, you have control over which risk rules to activate, allowing or blocking specific user actions. 

Here’s how:

Custom Rules

In all, SEON’s real-time data enrichment solution proves as a cost-effective and frictionless security layer.

You can easily build it into your product via code or plugins with the simple integration flow, thereby maintaining a seamless onboarding process.

You also can delay IDV checks until when absolutely necessary, so you only assess users deemed legitimate, or ask customers to fill in extra fields. 

Simplify How You Prevent Digital Banking Fraud 

As a CRO or fraud manager, you’re tasked with fighting fraud while retaining a smooth-running customer journey. 

So you must be careful even as you seek fraud prevention solutions. You want to use robust, scalable risktech that still delivers a frictionless customer experience. 

SEON offers a rich list of modular APIs, through which you can choose just the APIs you need to integrate into your tech stack to get richer data. 

It is this ease of use and effectiveness that makes chief risk officers like Rudolfs Kregers, Chief Risk Officer at Alfa Finance, recommend SEON:

Rudolfs K Chief Risk Officer
[SEON’s review on G2]

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  • Banking Exchange: Neo and Challenger Bank Market to Reach $395bn by 2026
  • Krebs on Security: A Closer Look at the LAPSUS$ Data Extortion Group
  • Clari5: The Threat Within. Spotting and Arresting Insider Fraud
  • Zion Market Research: Neo and Challenger Bank Market – Global Industry Analysis
  • Forbes: PayPal Admits 4.5 Million Accounts Were Illegitimate As Fintech’s Fraud Problem Grows
  • Globe Newswire: New Report from Aberdeen Group Reveals Serious Impact of Credential Stuffing and Account Takeover Attacks on the Financial Services Industry
  • The Fintech Times: Acuant: How AI and Machine Learning are Fueling Fraud Prevention in an Evolving Digital Economy
  • Express: Monzo issues urgent warning to all banking customers and ignoring it could be costly

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Author avatar
Tamas Kadar

Tamas is the founder and CEO of SEON and an expert in all the technological aspects of fraud prevention.

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