How can fintechs prevent finalcial fraud?

The digitisation of the economy is one of the major trends that has characterised the financial sector in recent years. However, growth faces a threat: financial fraud. This is a danger that can be combated by the fintechs, which are addressing the challenge by developing complex fraud management technology.

The digitisation of the economy has created new services and challenges. Fintechs respond with technological tools to prevent financial fraud.

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Reading time: 4 min

The pandemic greatly accelerated the digitisation of the economy, a trend that has led to the fintechs becoming key players in the banking landscape, together with the digital transformation that’s unfolding on a global scale.  

What’s a fintech? 

The term fintech stems from a combination of the words finance and technology. This term refers to activities that employ innovation and technological developments in the design, range and provision of financial products and services, as outlined by the CNMV, National Securities Market Commission.  

This is a sector within the financial industry that uses technology to facilitate access to certain financial services. For example, we could mention current-day accessible and convenient developments such as digital wallets, investment applications and online banking as part of this market.  

Another notable feature of this industry is its independence from the traditional large companies. In this respect, we can differentiate between the startups that are seeking to energise the financial industry and the much larger companies that now provide digital services.  

The main aim of the fintechs is not just to use technology, but to use it for a specific purpose: to democratise processes that traditional companies execute in a less streamlined manner. The problem is that this dynamic approach makes them vulnerable to financial fraud.  

The benefits of fintechs  

The main advantages of the kind of company offering this type of service are speed, optimisation of resources andvthe variety of the services themselves. The response time for application processes at a fintech ranges from 10 minutes to 48 hours. In addition, the processes are carried out on the Internet, so there’s no need for any transfer or processing at a physical branch. The time and resources invested are thus optimised.  

Finally, it’s important to emphasize that this financial sector has managed to segment its services in such a way that it can offer a wide range of services in keeping with its users’ needs.  

However, there are also certain factors to be borne in mind before you start working with one of these companies. You should take into account that they don’t have physical branches. This can prove to be a drawback for users who find it difficult to use the Internet, as everything is diverted to email and applications.  

Security should be a decisive factor, because, although some of these companies work with blockchain technology to improve security, not all of them do. Moreover, 100% digital financial channels are more laxly regulated with respect to the traditional banking sector, due to the fact that it’s a rapidly expanding phenomenon and the fintech environments are fairly new.  

Preventing digital financial fraud  

The flip side of the digitisation of the economy has resulted in a steady increase in digital financial fraud in recent years. Calculating its scale is no simple task, but, for example, e-commerce fraud is estimated to have increased by around 15% between 2020 and 2021. And the situation in the financial sector is no different.  

The fraud affects the user in most cases. These attacks are based on social engineering, i.e., the manipulation of people to get hold of sensitive data for other criminal purposes. To do this, the cybercriminals often use fake websites to mimic official ones in order to get users to enter their financial data. They also attract attention with offers that lead users to unwittingly install malware or imitate a customer service by means of emails, SMS and phone calls.  

Fintechs have reinforced the security of their internal platforms with automated systems capable of protecting their users’ identity and data. Generally speaking, these management systems combine encryption and use machine learning technology with the aim of making it easier to detect attacks. To do so, they use tools such as: 

  • Biometric identity validation systems. These systems check whether the documents recorded by customers match their facial or tactile biometrics. This leads to fewer cyberfraudster leaks and improves customer awareness standards.  
  • 100% digital customer recognition process. In addition to confirming the customer’s identity, it’s important to check whether his/her economic activity and origin are real. This leads to more objective and concise knowledge of the user.  
  • Restrictions on transfers to third-party accounts. All transactions must be carried out by the customer who owns the account. This reduces the risk of concealment of funds or funds of dubious origin via multiple foreign exchange transactions.  
  • Data enrichment. Fintechs use data enrichment to prevent tedious verification processes. They thus link the information provided by users to external databases, which detect, for example, whether they are on blacklists or whether there are any suspicious discrepancies.


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