Navigating FinTech Fraud: How Banks and FinTechs Can Work Together to Prevent Fraudulent Activities

How banks and FinTechs can work together to protect their businesses from fraudulent activities


Navigating FinTech Fraud: How Banks and FinTechs Can Work Together to Prevent Fraudulent Activities

How banks and FinTechs can work together to protect their businesses from fraudulent activities

To a bank, fraud is like an additional tax paid because fraud losses are predictable and expected when operating in the financial services industry.

When a bank partners with a FinTech in a Banking as a Service (BaaS) model, it mitigates risk by placing the responsibility for fraud losses onto the FinTech. However, since the economics of the bank and FinTech are inextricably linked, it is in the bank’s interest to ensure controls are in place to help FinTech partners prevent fraud while protecting the bottom line.

In addition, many fraud losses are potentially financial crimes that would trigger assessment to file a suspicious activity report to regulatory authorities. As a result, the bank is very mindful of the FinTechs that operate on its platform and any fraud that is detected.

This article describes the risks a FinTech faces as it navigates fraud detection and how banks and FinTechs can work together to protect their businesses and their profit margins from fraudsters.

The risk of fraud for FinTechs

Last year, the number of fraud cases in the finance sector surged as more people went online for their banking needs. Experts estimate that more than $1 trillion was lost globally to cybercrime in 2020.

Fraudsters are particularly attracted to the FinTech industry. FinTechs are on the cutting edge of technological development where security models are in their infancy and cybercriminals see opportunities to exploit weaknesses in data protection. The characteristics that make FinTechs so attractive to consumers—digital, low barrier to entry, cross-border, mobile-first security, etc.—also make them attractive to cybercriminals. As a result, most FinTechs will be targeted by fraudsters within days of launch.

FinTechs that fail to prepare for fraud will struggle to survive with precious capital to cover the losses. But even FinTechs with traditional fraud prevention policies and programs are vulnerable to attack. As FinTechs become more established, the risk will grow as the frequency and volume of digital transactions increase.

Types of FinTech fraud

With the advent of digital transformation, online fraud—and the types of fraud—have multiplied. The most common types include phishing, synthetic identity fraud, account fraud, and transaction fraud.


Phishing is a type of social engineering that relies on individuals unknowingly volunteering personal details or information that can then be used for criminal purposes. It is often carried out through the creation of a fraudulent website, email, or text appearing to represent a legitimate person or company.

Synthetic identity fraud

To commit synthetic identity fraud, fraudsters steal legitimate social security numbers from people who aren't using their credit (e.g., a child, homeless person, deceased individual, or someone who is incarcerated), adding fake addresses, phone numbers, and even social media accounts. They use this synthetic identity to apply for credit.

The initial credit request will usually be denied, but the denial creates a profile with that social security number in the credit reporting system, legitimizing the fake identity. The fraudsters will keep applying for credit, often moving down market to smaller financial institutions or FinTechs with less mature identity verification processes, until a request is granted.

Once an account is opened, fraudsters may even pay charges on time to build a credit history, along with a significant credit increase, allowing them to make off with more money.

Account fraud

Account fraud is one of the biggest problems in FinTech, costing the industry billions per year. Account takeover fraud and account opening fraud are the most problematic. In fact, 57% of businesses report higher fraud losses associated with account opening and account takeover than other types of fraud.

Account takeover fraud occurs when a fraudster takes control of a legitimate account that belongs to someone else. Account opening fraud (also known as fraudulent applications fraud) occurs when a fraudster opens an entirely new account using stolen or synthetic identities.

Transaction fraud

Transaction fraud occurs when a stolen payment card is used to generate an unauthorized transaction. Since FinTechs pride themselves on their ability to do real-time digital transactions, they are particularly at risk of transaction fraud. Quicker transaction times increase the chances of fraudulent transactions going undetected.

FinTech fraud can originate at account creation, login, and wherever money flows in and out of various FinTech categories like deposits, payments to merchants, transfers, and withdrawals.

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Challenges implementing FinTech fraud prevention

While fraud is inevitable, it is not unmanageable. There are many ways FinTechs can detect and prevent fraud. Like all effective security models, a blend of people, processes, and technology is required. However, several challenges remain:


Researching and performing the required due diligence with a fraud protection provider is time-consuming. Once the FinTech finds the right fit, implementing the solution and integrating it with their technology stack is costly. Set-up fees alone can be hundreds of thousands of dollars—an unrealistic capital investment for a new startup.


The prohibitive costs can result in the implementation of a smaller solution that is unable to scale as the business grows, leaving the FinTech vulnerable to fraudulent activity. As online payment processing and overall volumes increase, detecting fraudulent transactions becomes even more difficult.


Other outsourced or integrated service providers—such as ledger or KYC—may require additional fraud monitoring and oversight which increases the size of the solution required to keep the FinTech safe.

A collaborative approach to FinTech fraud prevention

As the fraud landscape becomes increasingly more complex, it becomes trickier to identify questionable patterns and catch fraudsters in the act. Fraud solutions that include data visualization and machine learning can equip FinTechs with the tools they need to easily detect and address financial crime.

With Synctera’s Banking as a Service platform, for example, banks can provide FinTechs with a way to monitor all transactions in real-time, preventing even the most complex fraud occurrences with accuracy and scalability.

The platform’s built-in fraud protection service uses machine learning-powered risk scoring to maximize fraudulent event detection. With greater detection accuracy comes fewer false positives, ensuring legitimate transactions aren’t affected by fraud mitigation measures.

To roll out this type of advanced solution would cost a FinTech significantly in time, resources, and cash. By availing of it through their banking partner, FinTechs can get to market quickly and safely, with the assurance that their fraud solution has the power and scope to scale with them as they grow.

Whether you’re new to bank/fintech partnerships or you have an existing program already in place, we can help. Contact us today.

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