In an economy that is taking place increasingly online, the recent boost in fraud has left many banks, fintechs, and retailers underprepared in the fight against bad actors.

In a recent conversation, I spoke with Neustar Senior VP Robert McKay, who offered his perspective on the increase in fraud, the use of device reputation tracking, and steps firms can take to minimize their shortcomings.

Catch us up on the current security landscape in fintech and banking

Robert McKay: The pandemic has forced almost all customer interactions with institutions to digital channels. While it offers a new level of convenience for customers, it has exacerbated an existing problem in these types of interactions – increasing ambiguity for seeking secure, trusted connections across anonymous interactions. Institutions and fintechs that deal with highly sensitive customer information have long struggled to properly authenticate the identities of consumers across these digital channels, and fraudsters have developed savvy methods to skirt some of the most prominent forms of identity authentication.

Trust is at the center of successful fraud mitigation. If you can trust, with a high enough level of confidence, that the person on other end of the device is who they claim to be, then financial institutions and fintechs can reduce friction and improve the experience for legitimate customers while limiting additional verification and fraud-fighting resources to suspicious interactions.

2020 disrupted every subsector of fintech. Talk to us about how it changed the online security realm.

McKay: McKinsey cited that the pre-COVID consumer adoption rates for performing balance inquiries and transactions in the digital channels in the U.S. was at 50% while adoption for more complex activities like new account openings or credit card applications was around 36%. Many institutions and fintechs had to quickly address this as consumer activity shifts boomed across digital channels in a ‘survive-or-die’ approach. The combination of branch closures and an under-preparedness for these digital shifts resulted in spikes in call volumes and wait times, for example.

This disruption also shown a light on the robustness of institution’s authentication processes. Throughout 2020, a commonly used method for mitigating fraud was device behavior analysis using device reputation tracking, which determines whether a device has been linked to fraud in the past. Today, fraudsters can easily bypass this method by constantly rotating out devices they use to commit fraud.

Fintechs and their business customers need to take a more comprehensive approach to consumer authentication, exploring who is behind the device rather than focusing exclusively on the device itself.

Discuss what device reputation tracking is and why it is no longer an acceptable form of fraud prevention.

McKay: Device reputation tracking is a method of fraud mitigation that gathers device fingerprints — a series of device characteristics – and assembles a view of that device’s previous association with fraudulent activity. It’s a simple, yet effective, method to catch basic forms of fraud. However, sophisticated fraudsters know this approach relies on backward-looking data, and avoid it by using multiple ‘burner’ devices to commit fraud. Once they complete their interaction, they’ll abandon that device and use a new device to continue their scam. New devices present a big question mark to device reputation solutions since, without past user data, it cannot indicate whether the new device can be trusted.

Additionally, knowing a device is connected to normal or safe behaviors is also not a failsafe solution. It only takes one time for a device to fall into the wrong hands to open the door to fraud.

What is the easiest way for a firm currently using device reputation tracking or fingerprinting to adapt to a more secure fraud prevention technique?

McKay: To adapt, firms should consider a device-based identity resolution technique that connects the device to what is known about a consumer with persistence, and then observe how this online/offline identity graph is honed through continued observations of digital interactions. These online/offline identity graphs should also draw upon historical behavioral data and device fingerprints as just one source element of a multilayered fraud-prevention approach.

Device-based identity resolution determines not only whether a device has been linked to unsafe behaviors in the past, but also whether the device is likely in the hands of the individual who owns it. Hundreds of signals in an array of combinations provide a clear direction to either proceed with the transaction or seek additional verification from the fraud team.

A robust, layered approach like this incorporates data that cannot be hacked and stops fraud in its tracks.

The digital identity conversation is hotter than ever. What are some new developments in this space that we should be paying attention to?

McKay: Consumers, especially digital natives, have developed high expectations for a frictionless customer experience. When considering fraud-mitigation tools, it is critical to remember that most consumers are not fraudsters. If businesses treat all customers as such, it will increase friction and drive good customers away. To provide a smooth customer experience while simultaneously reducing the risk of fraud, businesses need authoritative identity signals that enable them to accurately evaluate the degree of trust in digital interactions.

As fintechs look to accommodate an increasingly remote customer interaction model, it is even more essential to ensure the person on the other end of the interaction is who they claim to be.

What is the number one way you see financial firms fail in terms of security?

McKay: Firms often scrutinize and treat every interaction as possible fraud. This not only impedes the customer experience, but also spreads already thin fraud resources even thinner, leaving the business scrambling and that much more vulnerable to fraud.

Further impeding sound security and efficient fraud mitigation, many firms fail to make the connections across various customer touchpoints (e.g., digital, call center, in-person) and across different business units (e.g., credit card, retail, insurance) to gain the full view of a customer’s identity.

What is the best way for firms to fix this flaw?

McKay: Firms should seek out an identity resolution organization that can help form an identity graph with a singular view of a consumer against every touchpoint, and implement strong and silent authentication measures to automatically authenticate the great majority of interactions that are legitimate. This will allow firms to focus fraud-fighting resources and warranted consumer friction on the minority of interactions that truly represent potential fraud, instead of applying fraud fighting resources against every call center and digital interaction.

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Consult Hyperion’s Global Ambassador – and frequent Finovate keynote speaker – David Birch is bringing his diplomatic talents to Digital Jersey, where he has been named the Fintech Ambassador for the island-based technology hub.

“I’m delighted to take on this role with Digital Jersey,” Birch said in a statement. “After visiting the island many times over the last few years, I have seen first-hand the opportunities provided by the technology and regulatory infrastructure there. This, combined with its world-class connectivity with an agile, innovative mindset, makes Jersey an interesting proposition in the Fintech space. I’m looking forward to working more closely with the DJ team.”

The largest of the islands in the English Channel between England and France, Jersey is home to Digital Jersey, a state-supported economic development agency and association designed to help grow the island’s digital sector. Established in 2013, Digital Jersey offers a co-working space for technology workers (with both hot and dedicated desks), as well as a lab designed specifically for testing IoT solutions, Digital Jersey Xchange (DJX). In addition to promoting sustainable economic growth on the estimated 107,000-person island and creating a “connected, digital society and enhanced quality of life” there, Digital Jersey also seeks to establish itself as a world-renowned digital center.

“Dave has an excellent reputation built through decades of experience,” Digital Jersey CEO Tony Moretta said. “We know he fully understands the unique advantages we have here in Jersey and will help spread the message off-island that we are open for business in the fintech arena.”

Formally known as the Balliwick of Jersey, the 45 square mile island has been the site of a significant amount of technology innovation compared to its larger, neighboring jurisdictions. Jersey was a pioneer in bringing full-fiber broadband to every home and, in 2016, the Jersey Financial Services Commission, was among the first jurisdictions in the world to implement a virtual currency regime.

Hear David Birch talk more about Jersey and fintech innovation. And check out our most recent conversation with “The Ambassador”, discussing one of his most commonly-requested topics: banks, digital identity, and the challenge of Big Tech.

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I came across Dan Kimerling while chasing down the latest investment insights from Cathie Wood, whose ARK investment funds have been among the most sought-after, best-performing funds for the past few years. Dedicated explicitly to the most disruptive companies in the most disruptive sectors of the economy, Wood’s ARK funds are an interesting place to look when trying to learn about those companies that could become the next Amazon, or the next Tesla.

One of the people ARK’s analysts have turned for insight into disruption in the fintech industry specifically is Dan Kimerling, co-founder and Managing Partner of Deciens Capital. As Kimerling explained in an interview from last fall, he realized early in his career that there were “incredible” venture capital funds involved in fintech and “incredible” venture capitalists involved in seed funding, but “there’s nothing at that intersection of fintech early stage capital.”

He added, “… and where there is capital, it rarely will lead financings. A lot of them will be follow-on financings or if they are angels or smaller managers, they are not in a position to lead rounds.” He said that if Deciens stood for one thing, it’s leading seed rounds in fintech companies in the United States.

What has Kimerling’s attention as we move into 2021? As someone who saw back in 2012 that open APIs were the future of banking, Kimerling now underscores three factors that will drive fintech evolution in the coming years. These include what he calls “the scope of the prize” – fintech’s massive opportunity as 20% of GDP – as well as the rise of embedded finance which will enable more companies to participate and compete in financial services, driving competition and innovation.

Perhaps most interesting is the one factor Kimerling called “the most exciting”: the development of a cultural “context where smart ambitious professionals, especially early career professionals, feel like working on innovative businesses is a socially acceptable career trajectory.”

Check out his conversation with ARK Invest’s Max Friedrich and George Whitridge (currently of Graham Capital Management) from October 2020.

Launched in 2012, Deciens Capital supports early-stage companies in a wide range of fintech areas including payments, lending, insurance, regtech, and financial wellness. Among the firm’s portfolio companies are Chipper Cash – which raised more than $44 million in funding last year – Funding University, and Finovate alum True Link Financial.

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Our keynote speaker series has been a major feature in the transformation of Finovate from a demo-only showcase to its current incarnation as a digital-friendly, intellectual marketplace for fintech insight and thought leadership, as well.

With a new set of digital and in-person events planned for 2021, we wanted to take a quick look back at some of the speakers who have provided some of the most unique insights into the nexus of finance, technology, and society over the past year. Stay tuned for big announcements this month on what we’ve got in store!

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Steven Van Belleghem, author of Customers The Day After Tomorrow

Providing a special address at FinovateEurope just over a year ago, Belleghem took attendees on a fun and insightful journey that looked at how enabling technologies – from 4G and social media – have forced businesses to reconsider the nature of customer service. And with even more powerful enabling technologies like quantum computing and AI right around the corner, he suggested further disruptions to and opportunities in the relationship between customers, businesses, and the products and services they provide are almost assured.

Interestingly, Belleghem points to a new relationship – B2A or business-to-assistant – that will actually make it easier for all parties to negotiate this new, more personalized, but more complex and challenging e-commerce experience. But even as he sees the consumer taking a less active role in everyday financial decision-making, Belleghem still sees human nature behind the wheel. “It’s not going to just be technology that drives new customer expectations,” he said, “it is also going to be personal dreams and wishes, and also the challenges the world will be facing.”

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Pablos Holman, Futurist, Founder of Turing AI

“Please crawl out your window,” folk singer Bob Dylan once crooned. “Use your arms and legs, they won’t ruin you.” A similar sentiment was at the center of the keynote address by futurist and founder of Turing AI, Pablos Holman. Speaking at our first all-digital fintech conference, FinovateFall Digital, back in September, Holman urged his audience to focus on solutions to real problems and to avoid the comfort zone of the tried and true. “Nobody has ever invented a new technology by reading the directions,” Holman noted.

For fintechs specifically, Holman – who is also an Inventor with the Intellectual Ventures Lab – urges two strategies. First he encourages startups to see bank partnerships as a way to understand more clearly the needs of financial institutions and their customers. Second, Holman bluntly recommends “running a lot of experiments” to ensure that you remain open to often-overlooked solutions that might actually work best.

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Nancy Giordano, strategic futurist and TEDx curator

In her keynote opening address at FinovateWest Digital, Navigating the Big Shift – How Exponential Technologies are Changing … Everything, Nancy Giordano highlighted the fact that as we are struggling to keep up with rapid technological change, we must be vigilant to the pitfalls of becoming paralyzed in the face of it.

For businesses, the strategic futurist cautions against the temptation to “not make decisions,” encouraging them instead to be readier to “act dynamically” in the face of uncertainty. A little over a generation ago, it was the political that became personal. Increasingly, Giordano observed, it is the professional that is becoming personal. And technology is playing a major part in making this happen.

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