Given the growing threat of fraud and malicious activities, companies need to take extra precautions to protect their customers and watch their bottom line this year.
Digitalisation has transformed the way commerce and financial services are being delivered and adopted across the globe, even before the pandemic.
However, as everything from banking, paying and working to shopping and entertainment have moved steadily online, the number of data points and gaps for hackers and fraudsters to exploit has risen exponentially.
With businesses becoming increasingly reliant on digital onboarding and having interactions without ever meeting their customers face-to-face, they face a greater risk of fraud that could result in significant financial, operational and reputational loss.
Given this backdrop, here are three key ways businesses can protect themselves in 2023.
Protect against the growing threat of synthetic fraud
Among various types of fraud, social engineering and synthetic identity fraud are becoming increasingly urgent challenges for companies.
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Synthetic identity fraud is a tactic where fraudsters combine real information, such as a national ID number bought from the Dark Web, with a fake name and birthdate to create fake identities and open accounts.
In Southeast Asia, data breaches in Singapore, Malaysia and Indonesia last year have resulted in the personal data of millions of customers being sold online.
Using this data and exploiting weaknesses in insecure networks and lax customer verification and onboarding procedures, syndicates can easily create synthetic identities at scale, defrauding retailers, government agencies and financial institutions.
Synthetic fraud is particularly challenging to detect as the fake identities are developed over months or even years, just like a Frankenstein monster that is sewn together and built over time.
These synthetic identities appear like genuine accounts with routine, normal transactions until they “bust out”, for example, by taking out a huge loan or making a very big purchase with no intention of paying back.
When detected, the loan or purchase cannot be traced back to a specific victim because the identity is fictional.
According to Worldpay’s Payment Risk Survey, 61 per cent of merchants in the Asia-Pacific region have reported experiencing synthetic identity fraud, the highest percentage among global regions.
In the US alone, US$20 billion was lost to synthetic identity fraud in 2020.
Implement a robust but balanced risk management framework
As losses from insecure systems continue to mount, robust identity verification and fraud detection will become imperative for businesses.
There are two main approaches for identity verification for companies doing business digitally: user-centric, which leverages AI methods including optical character recognition and liveness detection to validate documents like passports or driving licenses and verify users; and data-centric, which validates users with information from credible, third-party databases such as credit bureaus.
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Combined, they comprise one aspect of Know Your Customer (KYC) procedures: the Customer Identity Programme (CIP).
Other due diligence and ongoing detection and monitoring of risks are also part of a company’s KYC and anti-money laundering (AML) compliance programme, including ongoing customer rescreening.
However, over-complicating compliance adds friction to the onboarding process, which can lead to drop-offs or abandonment, which is not optimal either.
Ultimately, companies must balance the cost of compliance against their risk, which is what the regulatory industry calls a risk-based approach.
There is no shortage of solutions available in the market today, but figuring out what and where to implement without increasing user friction is important to mitigating customer acquisition costs.
Thus, it is important to be able to leverage a platform that can orchestrate the many API solutions in the market today to target specific solutions necessary for each task.
That task could be identifying fraud signals from emails or phone numbers as a part of “pre-KYC”, implementing identity proofing using facial biometrics or AML name screening and then compiling all of those into a single customer view for the operations team to investigate.
Use compliance and regulation as a strategic business advantage
The recent collapse of FTX and other well-known crypto lenders and exchanges highlights the importance of compliance and regulatory frameworks in an increasingly digital economy.
Regulators are likely to focus on stricter standards for KYC, customer due diligence (CDD) and transaction monitoring, as well as AML or combating the financing of terrorism (CFT).
Regionally, the Financial Action Task Force continues to make their rounds auditing countries for compliance and enforcement of AML/CFT policies.
Those operating in the financial services space have a duty to ensure their KYC is in line with best practices and keeps fraudsters out of their platform.
Additionally, consumer and public education regarding digital identity hygiene are essential, particularly in emerging markets where a significant digital divide and knowledge gap still exist.
However, protecting users is not solely the responsibility of the government; businesses also have a duty and obligation to comply with changing regulatory standards while ensuring customer safety and security.
Preventing fraud risks not only helps companies avert reputational and revenue losses but also gives them a strategic edge over their competitors.
Companies that excel in this aspect not only meet their customer acquisition targets quickly and enjoy higher conversion rates but also enjoy peace of mind knowing their platforms are not being misused by criminal syndicates.
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