The following is a guest post written by Apoorv Gehlot, founder of Matellio LLC, a software engineering studio based in California.
Fintech has drastically improved the products and the services of the traditional financial services in the past few years. However, even after many financial institutions have readily adopted fintech services, there are still some hidden risks in the aforementioned industry. For instance, the integration of the fintech services in the existing banking solutions raised a severe concern for data security. Also, the rapid growth of digital platforms made the fintech industry and its customers uniquely vulnerable to various breaches in IT security networks.
Hence, it is vital to know about various hidden risks involved in the fintech services. Let’s discuss some of them here.
Trending challenges in fintech
Third-party security risks
Internal security is not always enough, especially when it comes to banks. Hence, much of the time, when banks or other financial institutions leverage a fintech service from a not-so-trusted service provider, they end up losing their data, experiencing service failures, and may even suffer a loss of reputation because of inefficient data. These types of damages occur due to third-party security risks. To eliminate third-party risks involved with fintech services, banks and financial institutions should consider the fintech relationship-related risks in their risk management assessment.
Malware attacks and hacking are the most prominent types of security issues that are prevalent in the global market. The hackers are now targeting the Society for Worldwide Interbank Financial Telecommunication (SWIFT) more easily. SWIFT systems are used by almost all the banks and top financial institutions to exchange vital financial information.
However, the recent cyberattack on the SWIFT infrastructure indicated the level sophistication of the hackers and malware attackers. The banks and financial institutions have vulnerabilities in their processes, and the hackers take advantage of these vulnerabilities to launch malware attacks.
We all know that data plays a crucial role in every industry irrespective of their domain. And when it comes to banks and other financial institutions, data automatically becomes a matter of utmost importance. However, with the introduction of inefficient fintech systems in the finance industry, the problems of data breaches rose to a great extent.
Payment card details and user information are readily available to hackers making online transactions prone to cyber thefts. The financial institution partners with third parties, and then data losses may occur due to their inefficient fintech services.
Application Security Risk
Fintech applications are used by many banks to access the real-time financial information of their customers. They leverage this real-time information to carry out transactions and for performing other banking operations.
However, if a software application does not have foolproof security modules and efficient codes, then it automatically becomes more prone to cyber thefts. The attackers leverage the weak security of the applications to steal the customer data and other vital information. So if a person is planning to develop a fintech software solution they need to be very sure that the application has all the vital security features included in it.
Money Laundering Risk
Fintech-driven banks often use cryptocurrency for carrying out financial transactions. These cryptocurrencies are an integral part of the fintech ecosystem, and they are not formally regulated by any set of standards and global regulations.
Hence, the frequent use of non-regulated currencies results in illegal money laundering and even in terrorist funding. Since identifying the beneficiary in any fintech-enabled transactions is not possible due to fintech’s pseudonymous nature, the money laundering operations get enough support from the fintech services.
Digital Identity Risks
With the introduction of digital tools in the banking and finance industry, the use of mobile-based services that used one-time passwords and security codes increased drastically. These security codes and passwords are not as safe and can be easily accessed by a hacker.
The vital data of the banking customers could be easily accessed due to the faulty fintech system provided by some of the fintech service providers. Hence, financial institutions need to revisit their online security architecture to address these risk factors before planning for fintech implementation.
Legacy Banking Systems
Banks are struggling hard to develop and introduce advanced fintech services in their non-patched core banking systems. These traditional banking systems are very much vulnerable to all sorts of cyber thefts. And the main concern is way more than that.
When the tech-friendly fintech services integrate with the existing non-secured banking systems, there are chances that they will be at the target of attackers too. So, the first duty for any financial institution before implementing fintech in their organization is to refresh their core banking systems. That will help the company eliminate losses due to cyber thefts.
Cloud-based Security Risks
Cloud-based solutions are one of the significant aspects of the fintech industry. From payment gateways and digital wallets to secure online payments, cloud computing services offer everything in the fintech ecosystem. Maintaining the confidentiality and security of financial data is critical to banks and financial institutions.
Even though the cloud-based services are considered a secure means of storing the data, lack of adequate security measures can result in the corruption of your sensitive financial information. There are instances when the company partners with an inefficient, cloud-based solution provider and then deals with significant data losses. Therefore, stay updated and be wise while selecting your cloud-based service partner.
To conclude, we can say that, if hackers are unbeaten in their efforts to access the fintech platform with ease and efficiency, the faith of banking customers in the technology-driven fintech platform will be significantly reduced. All this will result in the slow growth of the fintech industry. Hence, balanced innovation is needed to promote the growth of the fintech industry and mitigate the hidden risks of fintech services.
Apoorv Gehlot takes a keen interest in exploring various aspects of the digital realm, and ideate solutions with his team of innovators. He believes in sharing his experience and knowledge with readers across the world to enlighten the audience through concise and meaningful write-ups.