Fintech Fraud Prevention: Mitigate Risks & Retain More Profits

Morgan Ackley | Monday, October 30th, 2023 | 12 minutes

Fraud in the fintech industry has only increased in the past couple years as more consumers adopt new technologies that hit the market. There are a variety of ways that fraud can happen and various risks to fintech companies. Know what those threats are so that you can remain profitable and stop the most amount of fraud possible.

How Does Fintech Fraud Happen?

Customers and fraudsters alike can commit fraud. And some tactics are becoming more sophisticated. No matter how they happen, these threats can have major impacts on your business.

Customers misuse the dispute process.

Sometimes customers forget about the purchases they make or don’t recognize the billing descriptors on their statements. They automatically assume fraud and file a dispute.

For example, say a customer chooses a buy now pay later (BNPL) option at checkout. When the monthly bill comes, the customer doesn’t remember making the purchase so calls the bank and disputes the charge. And if you’re the BNPL provider, you pay the price.

Sometimes, however, customers intentionally make purchases and file disputes later so they don’t have to make payments. This kind of scheme is known as friendly fraud, and can be detrimental to your bottom line if the issue gets out of hand.

What to watch for:

  • Customers who have done business with you before without filing any disputes.
  • Orders that are not eligible for a return or refund.
  • Transactions with big-ticket items that could later trigger buyer’s remorse.
  • Purchases that could unknowingly be made by a family member, such as a game or music download.

What you can do:

  • Make your billing descriptors clear and easy to recognize.
  • Remind customers of recurring billing cycles.
  • Implement dispute response tools — such as RDR and prevention alerts to quickly resolve disputes.

Fraudsters take over accounts.

If you allow customers to create an account with you, your business is at risk for account takeover (ATO) fraud. During an ATO attack, fraudsters use various methods to break into customer accounts. Once they gain access to accounts, they can change login credentials, steal payment information, or make purchases with the account.

This kind of attack can open the door for identity theft, debit and credit card fraud, and more. And customers will hold you accountable for anything that happens to their accounts and payment info.

What to watch for:

  • Sudden changes in account activity from new devices, IP addresses, locations, etc.
  • Multiple failed login attempts.

What you can do:

  • Set limits on the number of login attempts in a day.
  • Send emails to account holders whenever changes to the account are made.
  • Notify account holders of suspicious logins.
  • Require step-up or multi-factor authentication for changes to the account information.

Unauthorized transactions happen.

It’s incredibly easy for fraudsters to make unauthorized transactions — whether it’s by using someone else’s digital wallet or hacking into a customer’s account. And often, those unauthorized purchases lead to disputes and chargebacks.

Fraudsters can also scam your business by posing as a legitimate company and requesting funds through ACH transfers, instant payment methods, or payment apps. If you send money to the wrong person, you may never get it back.

What to watch for:

  • Suspicious login attempts into customer accounts.
  • Requests made during unusual business hours.
  • Requests made by someone you don’t recognize on behalf of a business.

What you can do:

  • Limit the number of login attempts.
  • Deny unusual requests.
  • Add a pre-authorization fraud tool to block unauthorized transactions.

Fraudsters use synthetic IDs to open accounts.

Fraudsters often create fake accounts or apply for loans and credit using synthetic identities. These are identities made up of real and fake information — such as a real social security number and made-up name or email address.

Fake accounts made using synthetic identities are incredibly harmful to your business because it’s nearly impossible to trace the fraud back to anyone and you may never recover the money you lose.

For example, say a fraudster opens a fake account with you and applies for a loan. That fraudster then uses the loan to make a big purchase but never starts paying it back.

The reality is that it’s extremely difficult to identify synthetic identities without technology because they are designed to look authentic, surpassing typical identity verification checks.

What to watch for:

  • Similar customer information across multiple accounts – such as social security numbers and contact information.
  • Behavior from similar IP and device combos, indicating a single user or org could be attempting to use multiple Identities.
  • Trends over time such as consistent small transactions and then a sudden large value transaction.

What you can do:

  • Implement rigid screening protocols — such as customer KYC.

Ways Financial Fraud Can Impact you

Fraudulent activities can hurt your business in a variety of ways. Understanding these impacts can help you create an effective fraud prevention strategy.

It can increase your chargeback rate.

When customers commit friendly fraud or fraudsters make unauthorized transactions, you typically wind up with chargebacks. And the more chargebacks you get, the higher your chargeback rate climbs. If it gets too high, you run the risk of penalties, fines, enrollment in a chargeback monitoring program, or possibly the inability to operate your business.

It can hurt your bottom line.

Not all instances of fraud are obvious, but can be equally as damaging to your business. For example, running credit checks on fraudsters can hurt your bottom line. Costs of vetting loan applicants can quickly accumulate — with the average price being around $30 to $35 for a hard credit check. Even more costly is the time you waste on credit checks for applicants that get denied.

It can cause revenue loss.

Synthetic identities are made to look real, which can cause major damage to your revenue. If you issue loans or credit to someone using a synthetic identity, you will more than likely never collect money from them. For example, if you issue a $20,000 loan to someone only to find out later the identity was fake, you’re out that whole amount of money.

It may damage your relationships with card brands.

If you manage a portfolio of merchants, it’s on you to help keep fraud risks low. If your merchants get hit with fraud attacks that increase their chargeback rate, your overall merchant portfolio risk may increase. As a result, major card brands might charge you fees or terminate high-risk merchants.

It could lead to failed compliance.

If you deal with payments, you know that there are a lot of regulations and standards you need to comply with in order to stay in business — such as PSD2 and Strong Customer Authentication (SCA). Many fintech companies try to manage compliance requirements on their own, which can be challenging to do well, especially if you’re hit with major fraud attacks. Balancing fraud management and compliance takes time and money.

It could prevent you from increasing profit margins.

Fraud makes everyone look bad — merchants, lenders, payment processors. If you have any risks associated with merchant portfolios, you may not be able to acquire any new merchants in high-risk verticals. As a result, you can’t grow or increase your profit margins.

How to Mitigate Financial Fraud Risks

In order to keep your products and services operable and profitable, you need to stay ahead of fraud. There are many prevention methods available — some that require using technology and some that you can manage yourself.

Collect and evaluate data.

One of the key elements to fraud management is data. With it, you can discover trends, identify anomalies, detect emerging threats, and more. But you need to have the right kind of data. To drive the most accurate results possible, you’ll want to collect data around consumer device type and usage, physical and digital identity information, behavioral patterns, and transaction history.

Create policies and fraud controls.

Set up policies to automatically deny, accept, or manually review interactions that meet certain criteria. For example, if someone tries to open up an account with an email address that has never been used anywhere else before, you can either block the interaction or flag it for manual review.

Additionally, you can create fraud controls to decline certain interactions. For example, if a customer has made false fraud claims with you in the past, you can refuse to do business with them in the future.

Share data with other fintech companies.

When one financial business experiences fraud, consumers start to get worried about other businesses in the same industry. For example, if Venmo started getting hit with account takeover attacks, consumers might be wary of other payment apps and avoid using them for a while. That could mean that consumers stop doing business with you because another company in your industry is experiencing fraud.

Start sharing data about known fraud schemes, suspicious patterns, and emerging threats with other fintech companies. Collaborating with others could help you uncover dangerous, sophisticated fraud schemes that you may not be able to detect on your own.

Kount offers an online platform where you can discuss all things fraud with peers. It’s called the Kount Community, and it’s available to you once you implement a Kount solution.

Use robust screening technology.

Stopping fraudsters relies on thorough identity verification protocols. In today’s world, you can’t rely on just one method to stop every kind of threat. You need technology that can screen individuals for major fraud risks — such as association with criminal or terrorist groups, synthetic identities, and more.

Implement tools to help manage chargebacks.

Resolve disputes before they affect your business by implementing chargeback management tools such as rapid dispute resolution (RDR) and prevention alerts. These tools help you respond quickly — even automatically — to certain disputes so that you can resolve them before they turn into chargebacks.

Learn more about chargeback prevention tools>

Use fraud detection and prevention software.

The most effective way to detect and prevent fraud is by using fraud software. Managing risk on your own can be confusing, time-consuming, and cause errors. Technology can replace manual processes with accurate, efficient, and effective automation.

You can also extend the fraud prevention software you use to your merchants. And if your merchants have less fraud, then so do you. Overall, you can help reduce the risks that may come from your merchant portfolio.

Want Help Reducing Financial Risks?

Managing fraud can be overwhelming. But it doesn’t have to be. We’re here to help! Kount has worked with all kinds of fintech businesses for years. We understand the fraud patterns and threats that plague your industry. Reach out to us to get help developing your fraud prevention strategy.

Contact our team to learn more!

Schedule a demo

Related content

See more related content


Morgan Ackley

Content Strategist

Morgan has worked in the tech industry for over 5 years. Her breadth of knowledge and curiosity about technology and all things fraud-related drive her to craft compelling, educational pieces for readers seeking answers.