How to reduce financial fraud with custom software development?

dollar bill stuck on a fishing hook


In the existing global environment, FinTech (financial technology) has been revolutionizing payment methods. Due to the ease and liberty that it provides, many companies have been switching to FinTech methods, leaving their traditional payment methods behind. This shift has become more prompt as the global pandemic took its toll on the entire world and people had no option but to stay inside. Companies have been investing in ready-made or custom software development to manage their finances. As FinTech has made everything far easier to access, it has also structured new pathways for crime and fraud. According to the reports, $90 Million were lost due to cybersecurity crimes until the mid of year 2020. 

These figures may seem daunting, but the security measures are controllable during the development process. There are different software options available in the market but when it comes to Finance or FinTech, the most flexible and customizable option is custom software development.

Common types of fraud

The most common frauds are:

Phishing/Spoofing: This refers to illegally accessing the victim’s personal and sensitive information. The victim can be an individual or an entire organization. Phishing and spoofing give way to compromised networks and cyber-attacks. The most common result of spoofing or phishing is the misuse of the victim’s financial information. In the most severe cases, the victim organizations come to the verge of bankruptcy. 

Synthetic Identity Fraud: Synthetic identity is created in this type of fraud by adding some fabricated information to some incomplete authentic data of a victim. The data can come from old, discarded ID cards, stolen ATM cards, lost documents, trashed bill receipts, etc. It is hard to detect such frauds as the identity does not cross with any victim completely and does not even seem fake. 

Transaction Fraud: In this scenario, stolen credit cards are used for making massive purchases.  This type of fraud can cause the most damage without getting detected instantly because the business has no clue who is purchasing the items. The theft is caught only in the case when the victims get to know about these purchases and file a report. However, the company must bear the loss of the purchases made from the stolen card. In most usual cases, the fraudster goes unrecognized. 

Account Takeover Fraud: This type of fraud occurs when the fraudster wants to extract a large amount of money from banks illegally. The common trend in this fraud is that the culprit maintains a clean and unsuspicious credit score and then takes a big amount of loan from the bank and disappears. Generally, the companies that fail or track those fraudsters go into debt and have to bear the losses.    

Counterfeit Banking Card Skimming: A tiny device is attached to gas stations or ATMs which copies the information from the credit card’s magnetic strips.   

Challenges of fraud prevention and detection

Fraud detection and prevention can be sought by the following

False Positives: False positive is when your system rejects a transaction even when it is legitimate. Blocking many such transaction requests will hurt your business and its reputation. Eventually, your customers will decrease in number and will be more likely to prefer your competitors. 

No Single Formula: Detecting and preventing fraudulent transactions is not as simple as one might think. A technique that your risk management team used one day might not be helpful the other day. Hence, the companies constantly need to take action and monitor suspicious behaviors.    

Affects the Customer Journey: Putting extra security measures in place is great to save your customers from being scammed. However, the excess of such steps might bother your customers. The core of human nature is to choose the easier and more manageable way. If your system takes up a lot of time for your clients to operate and manage their transactions, there is a high chance that they decide to go with some other vendor or company.    

Areas of focus

Robust Anti Money Laundering/Combating of Finance Terrorismprograms: Money Laundering and Terror funding are alarming for any country as well as all the financial institutions no matter wherever located and give birth to many crimes along the way. These crimes are cautiously planned to pass the existing innovative technology security. Therefore, it is critical to make the systems robust enough to combat such situations. These crimes drive multiple other crimes and usually take place as a complete process. Some of these crimes are market manipulation, illegal trade, racketeering, institutional corruption, and tax evasion. Innovative AML and CTF programs automate the real-time data related to various transactions. The system is robust enough to detect real-time anomalies and abnormal activities and send out warnings for the responsive team to handle.   

Sanctions risk assessment: Sanction risk assessment is the crucial part of a FinTech system as any financial threat comes with various disadvantages at different levels. Risk assessment makes sure to predict the upcoming risks and the stakeholders. The probable upcoming is mitigated by informing the stakeholders about the risk. Then giving them time to come up with some strategies to handle the risk and regulate and revisit the existing policies at the same time

Client relationship management: Database screening is the essential element of compliance control. Embedding technological innovations with this process amplifies the performance and makes the process more efficient and swifter. This includes checking the customer credibility with respect to national as well global watchlist databases (including unfavorable media coverage, wanted lists, sanctions, politically exposed persons (PEPs), exit controls lists, and more) and making sure no culprit goes unnoticed. In addition to database screening, financial institutions can implement risk-based KYC (Know-Your-Name) online checks to validate clients’ information, risk profiles, and behaviors—all of which can be compiled in data-rich dashboards and reports. This technique guarantees that regulatory guidelines and recommendations are followed more closely decreases the probability of false positives and initiates a more tailored client experience.  

Staff Training: No technology is intelligent enough to surpass the human mind and therefore, either on small scale or on a larger scale, human interaction is needed. It is, therefore, essential to have the team on board and make sure they have all the necessary skills. This will equip them with the knowledge to handle the advanced tools and handle exceptional situations or during some anomalies. Such scenarios are harder to handle by the automated systems due to the lack of their performance.    

Competitive Technological edge

Artificial Intelligence (AI) and Machine Learning (ML): ML can process a massive dataset with multiple variables in a small amount of time and even functions under unsupervised learning by generating patterns in the data. Machine Learning stores customer transaction journey along with all the other relevant details (such as date, time location, amount, etc.) and classifies clients’ behavior as normal or suspicious. The most frequently adopted pattern by the scammers is to empty the bank account or make the most of the sensitive information they have on hand before the victim gets to know they are scammed. Hence, the account sees huge amounts of transactions or purchases at irregular times or from different than usual places. AI detects this abnormality and marks the transactions as suspicious. The authorized companies make sure they have a mechanism of informing the internal team about this suspicious behavior and respective measures are taken. The software automatically sends alerts to the victim’s cell phone number or email, or if the situation is serious, the company calls the employee to confirm before proceeding with the transaction.      

Robotic Process Automation: Robotic Process Automation is also a type of automation as the name suggests so technically it comes under the umbrella of AI however an AI system keeps training itself with past experiences and updates its decision-making mechanism. On the contrary, a robotic process cannot train and update its decision-making and only performs those actions which are already fed in the system manually. Therefore, robotic process automation may seem to be a system with limited functionality. However, this makes it a good fit for assistance activities. RPA can be assigned repetitive tasks that otherwise take up a lot of human effort. With RPA in place, human abilities will be used in more critical tasks which require human intelligence.     

RegTech:  Regulatory and compliance have always been difficult tasks for financial institutions and enterprises. AI and machine learning finance technologies have simplified this work for them. The AI-powered RegTech automates the communications compliance lifecycle, lowering risks, making regulation more efficient, and ensuring profitability. RegTech is a fantastic AI solution for financial firms because of these capabilities. As the law keeps making amendments in the policies to make sure no money laundering or finTech fraud takes place, so instead of burdening developers to update the FinTech software systems, RegTech comes into play. RegTech learns the laws and regulations and makes sure the system abides by those. As AI goes hand in hand with Regtech, the amendments and modifications in the legal policies are updated automatically. RegTech keeps KYC and AML in check and makes sure no fraudulent activity goes unnoticed.  

Blockchain: The blockchain is a safe environment when it comes to transaction monitoring. The thing that makes blockchain secure is the use of hashing and proof of work mechanisms.  As the name suggests, Blockchain is a whole chain of blocks that contain information about the transactions, stored in the form of a hash (which is a long string made of numbers and alphabets and it works as a fingerprint of the block). Each block has the information of the previous block’s hash along with its own so if any block changes (any transaction happens) the whole chain has to change. If there is a suspected fraudulent activity, in this case, it can be easily identified because it won’t match the hash. Another thing that reinforces blockchain’s security is the peer-to-peer network mechanism. If anyone makes a new block (a new transaction takes place), the copies of that transaction are forwarded to everyone in the network. This way, each transaction history remains intact.        

Off-the-shelf Software vs Custom Software development

Off-the-shelf software development most often than not is less expensive and consumes less time in development. However, off-the-shelf software could turn out to be more expensive than custom software because you may require to pay for full features which include the features that might not be required for your business need. It also restricts the features and functionality of your software. There is a high chance that such software does not meet the requirements thoroughly and you might have to make some compromises with your business targets. At the same time, for FinTech businesses, ready-made software also raises security issues. Custom software development consumes more time and money since it is developed from scratch solely to meet your business targets. With custom software development, you have the liberty to add the functionality to match your business requirements and even incorporate innovative technology according to your preference to increase the security of your software.  

Fraud Prevention with Custom software development

In FinTech businesses, security is of utmost importance to build the clients’ trust. Technology advancements in recent years have made it possible for FinTech companies and users to be secure from any type of security breaches and fraudulent activities. You can integrate innovative technology into your FinTech software like Robotic Processes, Data Analytics, AI, Blockchain, and Computer Vision to ensure your clients are getting the most secure environment to manage their funds and make transactions.  

Some use cases for technology innovations that you can blend into your custom software development are: 

  • Two-step verification before proceeding with any transaction online.
  • Robotic assistance for you and your customers for efficient data management decisions.
  • Use of Blockchain technology to strengthen security during transactions on a larger scale.
  • Use of Computer Vision technology to avoid any forgery such as fake e-signatures or transaction reports. 

You can get your custom software developed for your FinTech business and reinforce the security measures. For this purpose, hiring a complete expert in-house team might be a little complicated. It will cost you a fortune as there is an amalgamation of different technologies that go into the process. A better option is to partner up with a third-party custom software development firm as they usually already have extensive teams of experts. You can hire their skilled experts on a temporary basis to develop your bespoke software which matches your business goals. 

Partner up with Liventus to achieve Technology Edge

The finance industry in today’s world is adopting innovation in every aspect with easier than ever accessibility to clients and enable them to manage their funds and transaction in just a few clicks. This also gives way to several security threats as well. Custom software development enables companies to implement more security in their systems and in doing so, Liventus has been helping several clients from a variety of backgrounds. Liventus has a team of experts required throughout the process of high-security custom software development in Chicago for companies related to the finance industry.  

If you are looking for robust custom software development within Chicago for secure management of funds, get in touch with Liventus and make it happen. 

About the author

Danielle runs sales and marketing for Liventus. She is passionate about tackling new challenges and unlocking business opportunities.