Why fraud teams are investing in AI-powered ID checks

Flexibility has always been a strong suit for fintech companies, who are known for being innovative and quick to adapt to the ever-changing needs of their customers and the market. However, the past year has been particularly challenging for everyone, with the triple whammy of the pandemic, the war in Ukraine and rising inflation rates leading to huge instability. As a result, fintechs have had to reset and re-strategise in order to defend their competitive position.

Yet, despite recent layoffs in the tech sector and increasing concerns over a lack of funding, our research at OCR Labs, in collaboration with fintech consultancy FINTRAIL, has shown that fintech companies are taking proactive measures to combat fraud by investing in their fraud prevention capabilities.

It's easy to see why. According to a report by UK Finance, fraud losses cost £609.8 million in the first half of 2022 alone. This figure could have been worse had financial organisations not also prevented just under £584 million from being stolen during those six months.

For our Fighting Identity Fraud in an Economic Downturn survey, we asked 50 global members of FINTRAIL's FinTech FinCrime Exchange, a global network of fintechs, to share their experience of fraud. Almost 60% revealed they had seen a spike in fraud in the last 12 months. 58% said that both the value of fraud (the amount of money stolen) and the volume of fraud (the number of fraud attacks) have soared.
With another surge in scams expected in 2023, fintechs need to not only keep up with fraudsters but keep ahead of them.

Evolving threats

Of course, this is easier said than done. As digital transactions increase, cybercriminals are becoming more sophisticated in their attempts to carry out online fraud.

Take synthetic identity fraud, where a fraudster uses a combination of real and fabricated identity credentials to create a new identity. This identity will pass some less sophisticated checks, allowing the fraudster to open accounts and build a paper trail. This strengthens the new identity over time so that, eventually, it's credible enough to pass more rigorous identity checks – like those used by fintechs.

The rise of deepfakes - AI-generated media used by fraudsters to deceive people into believing they are real - has also made fraud prevention more challenging than ever. Deepfakes and synthetic document images can go undetected for longer periods of time, therefore maximising the return on investment for fraudsters.

Turning to automated solutions

One of the main challenges faced by fintechs is the length of time spent reviewing fraud cases, which can delay the resolution process and cause frustration for customers. To address this issue, nearly two-thirds of fintechs plan to add new automated identity verification (IDV) technology that can detect true human liveness, reducing the time required for manual review.

IDV software can help prevent fraud by verifying a user's identity through a variety of methods, such as document verification, biometric authentication, and liveness detection.

But it's important to use IDV software that stops fraudsters with zero bias for all users to protect against discrimination on the basis of race, age and gender. False positives, where legitimate users are mistakenly identified as fraudulent, can be just as damaging as actual fraud.

A low-risk transaction, such as creating an account, may only require basic identity verification, such as email verification or phone verification. On the other hand, a high-risk transaction, such as opening a new line of credit, may require more robust verification, such as document verification and biometric authentication.

Some users may not have access to certain verification methods, such as a government-issued ID, so offering alternative methods, such as social media verification or knowledge-based authentication, can help ensure that everyone has an equal opportunity to verify their identity.

Additionally, IDV software can be designed with privacy in mind, ensuring that user data is securely stored and processed in compliance with data protection regulations. This can help build trust with users, who may be hesitant to provide personal information if they feel it's not being handled appropriately.

The human touch

It's important to strike a balance between investing in technology and people. Fintechs that have sound business models and execution will grow headcount, despite hard economic downturns.

Our survey reveals two-thirds of firms plan to increase their budget for fraud prevention management initiatives. Notably, nine out of 10 fintech firms are planning to hire more fraud experts in 2023, demonstrating their commitment to protecting their customers from financial harm.

But the best solution isn't always to only throw people at a problem – it's about looking at how we can gain efficiency using software. Hiring more people is a short-term solution as humans can't scale the workload fast, are prone to errors due to manual review and are costing companies more. By investing in advanced technologies like fraud prevention, AI and Machine Learning and automated digital identity verification (IDV) software, fintech companies stand the best chance of efficiently tackling fraud and ensuring their customers' financial safety.