How Neobanks Can Better Tackle Fraud

The neobank industry was hitting a market size of?$47 billion US dollars in 2021 ?and is estimated to grow to more than $ 2 trillion in 2030. This makes it one of the fastest-growing industries out there.

However, the historical fraud rate of credit card issuing companies like traditional banks is lower than that of some?neobanks . This means that fraud, not growth, is the biggest challenge for neobanks. As an example, in 2022 alone, Paypal found?more than 4.5 million ?illegitimate accounts in their database.

Is the Fraud Rate Higher for Neobanks Than Traditional Banks?

While traditional banks average a fraud rate of 0.15%, neobanks and digital banking platforms experience a rough average of?0.30% in fraud rates . With a higher fraud rate on average,?neobanks ?must think about how to battle this both for their sake and for the sake of their customers.

When it comes to personal finance, the general public usually chooses safety and trust over comfort and innovative features. This is one of the main reasons why the majority of people don’t keep most of their money in a digital bank. The other main reason is that they aren’t tech-savvy.

What Can Neobanks Do About Public Perception and Fraud?

In terms of marketing positioning, it isn’t hard for a white label digital bank to present itself in its true form in front of customers. The main point here is that, first and foremost, average fraud rates must be achieved in order to be on the same level as traditional banks in this regard.

If you can clearly show and demonstrate to your customers that you are safer than the average traditional brick-and-mortar bank with statistics and data, then your clients will trust you.

But what if your statistics show otherwise? Is there a solution? Yes, there is.

Third-party Banking as a Service Solutions

A?white label neo bank ?can easily take advantage of a banking-as-a-service solution to step up its security game. A Multi-Decentralized private blockchain network can work wonders in terms of data encryption, storage, and decryption.

Blockchain Security

With the help of blockchain arrays, smart contracts, and machine learning, some third-party solutions can offer neobanks a level of security traditional security banks never had. Achieving a military level of security lets your customers rest at ease while your business flourishes with a lower fraud rate than traditional banks.

Let’s go into a practical example of how machine learning, automation, blockchain, and AI can help your white label digital banking platform battle fraud.

As mentioned before, Paypal experienced the creation and discovery of 4.5 million fraudulent users on the platform. This was a result of the small signup bonus that Paypal offered to its customers for opening new accounts. However, fraudsters quickly organized a scheme to register a large number of new accounts and cash out supposedly undetected.

Machine Learning Algorithms

Third-party banking-as-a-service solutions offer parsing machine learning algorithms that easily detect an unprecedented event in terms of account openings that would spike the charts and drive the attention of compliance officers toward it. If spikes in account openings are not necessarily linked to a marketing campaign, then it’s easy to think of the motive of fraudsters and discover what they’ve been up to.

Machine learning and AI can also determine whether someone else might be using your profile, virtual card, or banking application. Once the machine learning has enough data on you, if there’s a purchase out of the ordinary, it can flag it for you with a possible rollback. You’ll also be alerted by your phone if suspicious spending activities trigger the system.

Automated Security Rules

White label digital banking also relies on setting up security rules that monitor certain activities like transferring funds from new devices that have never been used before. The usage of a large number of devices or newly added ones is often linked with fraud or money laundering.

For that reason, anti-money-laundering procedures can be instilled into a neobank’s security processes by adding custom rules that follow guidelines for AML best practices.

Who Said Neobanks Aren’t Safe?

Once you’ve integrated blockchain, machine learning, and smart contracts into your security systems, and your percentage of fraud is much lower than the one of traditional banks, no client would ever think of your neobank as not trustworthy.

When it comes to personal finances, security and trust come first. Reaching out to third-party banking-as-a-service provider ensures that your?digital banking platform ?offers security and convenience at the same time.

Serge Beck , CEO and founder of Optherium Labs.