6 Common Fraud Types in Neobanking

The digital-first approach in the financial services and fintech industries has created ample opportunity for business growth. Unfortunately, it also triggered new vulnerabilities, particularly in the realm of financial fraud. With neobanks lacking physical branches and relying heavily on online processes, they become prime targets for fraudsters. This article delves into the prevalent fraud types within neobanking and outlines robust strategies for their prevention, ensuring security and trust in these modern financial institutions.

Fraud in neobanking

Neobanking operates primarily through digital interfaces, with no physical branches, turning traditional banking on its head. This model offers speed and user convenience but also reduces personal interaction which can help identify fraudulent activities. Neobanks thus face unique challenges in securing transactions and personal data. As fraudsters continually evolve their techniques, understanding the specific fraud risks in neobanking is crucial. These risks range from sophisticated cyberattacks to simpler, yet effective, social engineering ploys. By dissecting these threats, neobanks can better prepare and protect their customers from potential financial harm.

6 most common types of fraud in neobanking

Fraud evolves as time goes by and so do cybercrime and fincrime. There are numerous types of fraud in neobanking, albeit the most common ones, which are listed below, represent the biggest challenge for neobanks.

Account opening fraud

This type of fraud occurs when impostors use stolen or fabricated identities to create new bank accounts. This means that, ideally, fraud can be detected and prevented via account opening protection. The digital-only setup of neobanks can sometimes lack the rigorous in-person verification processes of traditional banks, making them attractive targets for such fraud. To combat this, neobanks are increasingly turning to advanced verification technologies that analyze digital footprints and biometric data to confirm identities reliably.

Identity theft

Fraudsters use phishing, vishing (voice phishing), and other forms of social engineering to gain unauthorized access to customers' personal information. They then exploit this information to usurp the victim’s identity. To give you a clear picture of the impact this phenomenon has on the world, it should be noted that fraud losses have topped $10 Billion in 2023 and a lot of these losses are connected to identity theft. Effective countermeasures include customer education on the importance of securing personal information and implementing sophisticated fraud detection systems that can flag unusual activity patterns typically associated with phishing exploits. Identity theft frequently relies on the usurpation of an existing person's identity, and after that can have alarming effects on individuals, financial organizations, and, of course, the entire financial ecosystem.

Account takeover (ATO) fraud

In ATO fraud, criminals obtain a user’s login credentials through various means, such as malware or data breaches, to gain control of a legitimate account. Neobanks need to ensure that sudden changes in account behavior are quickly noticed and addressed. The most important red flags that may indicate ATO fraud are unusual account activities, multiple failed login attempts, strange geographical login patterns, alterations in account details, and more. Explore Account Takeover Fraud in more detail.

Money laundering

The fast transaction capabilities and global reach of neobanks may be exploited for money laundering. Criminals attempt to obscure the illegal origins of money through rapid movement across various accounts and borders. Neobanks combat this with algorithms capable of detecting suspicious transaction patterns and integrating compliance checks into every stage of the customer journey. Also, before they develop a more sophisticated protection strategy, they should be fully aware of the complexities of layering in money laundering, as well as the top money mule red flags.

Payment fraud

Granted, we realize payment fraud is a bit too broad, and certainly, some of the frauds we have mentioned on this list can be regarded as payment fraud. However, the situation in the realm of neobank crime or fincrime isn’t as simple as one might think and in this modern age, there are many different payment fraud types. involves unauthorized transactions as a result of compromised account details. Neobanks employ real-time transaction monitoring and anomaly detection techniques to prevent such fraud, flagging transactions that deviate from a customer’s typical behavior.

Synthetic identity fraud

Synthetic identity fraud involves creating new identities using a combination of real and fake data. This complex fraud is difficult to detect as it may not directly harm any real individual but affects the financial system at large. For example, with synthetic identity fraud, there are many new challenges such as recognizing the role of deep fake tech in perpetuating fraud, and the power of AI which is used to create convincing fake images, videos, and audio recordings. Distinguishing between legitimate customers and fraudulent entities is harder than ever.

Stages of fraud prevention in neobanking

Effective fraud prevention in neobanking involves a comprehensive strategy that spans multiple stages of customer interaction, from onboarding through to transactions.

Onboarding

The onboarding process is critical in setting up defenses against fraud. Neobanks leverage advanced digital verification processes, such as document verification and biometric analysis, to ensure the authenticity of new customers. Additionally, integrating silent KYC (Know Your Customer) and AML (Anti-Money Laundering) checks can significantly enhance the ability to weed out potential fraudsters right from the start.

Login

Maintaining security during account access is crucial. Neobanks employ multi-layered authentication processes, including two-factor authentication and behavioral biometrics, which analyze user interaction patterns to detect anomalies. But being able to prevent end-user accounts from being compromised is the key here and ATO protection, based on digital footprints, can create a powerful barrier between financial organizations and fraudsters.  

Transaction

At the transaction level, maintaining a balance between security and customer convenience is key. Neobanks need to flag any suspicious transactions and to ensure a frictionless payment experience while staying compliant with additional authentication requirements.

Digital footprint analysis and ML

The application of cutting-edge technology is fundamental to combating fraud in the digital-first environment of neobanking. Machine learning and artificial intelligence (AI) are at the forefront, offering powerful tools that continually learn and adapt to new fraudulent techniques.

Machine learning algorithms excel in pattern recognition, which is crucial for identifying potential fraud. These algorithms analyze vast amounts of transaction data in real time to detect anomalies that could indicate fraudulent activities. For example, unusual login times or high-value transactions that do not match the customer's typical behavior can trigger alerts for further investigation.

Digital footprint analysis involves examining the data trail users leave behind as they interact with digital services. This includes analysis of devices used, IP addresses, browser settings. Neobanks use this information to build profiles that help distinguish between legitimate users and potential fraudsters. Such analysis not only helps in the early detection of fraud but also aids in minimizing false positives, which can disrupt the user experience.

Predictive analytics

Predictive analytics use historical data and AI algorithms to forecast future events. In fraud prevention, these tools can predict the likelihood of a transaction being fraudulent based on past patterns and trends. Utilizing Phone Intelligence and Email Analysis is the perfect way to get insight into these trends. Let’s not forget that when fraudsters commit their crimes, they usually rely on creating synthetic identities  - for example, fake bank accounts or fake credit histories. These can be difficult to discern from legitimate users. Utilizing open-source intelligence and a comprehensive reverse email lookup, and by accurately checking customer phone numbers, neobanks can go through a more thorough analysis of and even create a custom risk–scoring.

Specialized KYC

KYC, (Know Your Customer or Know Your Client), is a process that’s all too familiar to any bank. Neobanks are equally required to undergo this process before they start doing business with their customers. KYC can easily be described as a larger due diligence process. It denotes additional identity verification and authentication.

There are 3 KYC objectives:

• Verifying the customer’s identity
• Evading potential money laundering
• Determining whether the customer can use the neobank’s services and products  

Those are the basic KYC goals, albeit utilizing more specialized pre-KYC checks can assist neobanks as they:

• Unlock alternative data to improve AML and Risk assessment later on
• Filter out fake accounts, junk users, and so on.
• Cut KYC costs
• Reduce friction and improve user experience

This is simple to achieve. Neobanks start making their ideal fraud and risk assessment strategy by:

• Isolating trust and risk signals from phone intelligence and email analytics
• Creating custom score methodologies, and blacklisting or whitelisting information
• Easily calculating the risks during onboarding

Final thoughts

Neobanking has become increasingly prevalent, and fraud manifests in various forms, from account opening fraud and identity theft to sophisticated schemes like synthetic identity fraud and money mule operations. Neobanks, leveraging advanced technological tools such as machine learning, digital footprint analysis, and predictive analytics, are well-equipped to detect and prevent these fraudulent activities.

While these most common types of fraud are sometimes hard to distinguish, there are also many steps on the road to successful detection and prevention.

We invite you to discover more about fraud, news, and today’s trends in cybercrime and fincrime. In addition, feel free to reach out to our fraud experts if you have more questions.