Role of Fintech Startups in Combating Financial Crime

Fintech, a pivotal innovation in the financial sector, has become indispensable, revolutionizing traditional banking practices with efficiency and security enhancements. Innovations like UPI, e-wallets, digital banking, and instant online loans have reshaped modern finance, prioritizing customer accessibility and convenience. However, while these advancements are changing the innovation ecosystem, they are also susceptible to financial crime.

Despite rigorous preventive measures and security protocols, financial crimes persist as a significant challenge globally and regionally. The PwC Global Economic Crime and Fraud Survey (GECS) 2022 surveyed 1,296 organizations worldwide and their losses due to fraud or crime. Here’s what they reported –

  • Forty per cent experienced losses between USD 50,000 – 100,000
  • Seventeen per cent lost between USD 1-50 million
  • Five per cent incurred losses exceeding USD 50 million

In India, 52% of organizations reported experiencing some form of fraud or economic crime in the past 2-3 years. Fintech startups have a pivotal role in combating financial crime by developing tools and technologies for detection and prevention.

Strengthening Regulatory Compliance

Financial institutions must comply with various regulations to prevent crimes like money laundering and terrorist financing. Fintech startups can help these institutions meet regulatory requirements by providing the necessary tools and technologies.

Startups can develop compliance management systems to automate the transaction monitoring process for suspicious activity. Automating processes makes it easier for institutions to observe all the regulations effectively.

Making Financial Processes Safer

Fintech can prevent fraud by adding more layers of authentication and verification for every transaction. Encryption technology has especially proved game-changing for the sector. The companies also helped eliminate intermediaries, thus making transactions cheaper, faster and seamless.

Artificial intelligence (AI), machine learning, data analytics and blockchain technology enable fintech startups to create tools that make financial processes safer. Such tools can detect risks of financial crimes before they occur and alert customers/authorities in case of suspicious activity.

Fintech startups are using a range of advanced technologies to enable safe transactions in the startup ecosystem –

  • Data Analytics, Machine Learning, and AI: Fintech startups utilize advanced technologies like data analytics, machine learning, and artificial intelligence to enhance financial safety. These tools help identify suspicious transactions, detect money laundering activities, and ensure compliance with anti-money laundering regulations. They enable quick and precise detection of patterns indicating potential money laundering or fraud.
  • Biometric Technologies: Fintech startups employ biometric technologies such as facial recognition and fingerprint scanning to confirm customer identity, mitigating impersonation and identity theft risks. By requiring biometric information during account openings or transactions, fintech startups protect users from fraudsters and cybercriminals.
  • Automated AML Transaction Monitoring Systems: Startups develop automated systems like AML Transaction Monitoring to scan transactions and detect unusual financial activities precisely. These systems create risk-level-based rules and scenarios, enhancing the effectiveness of economic monitoring and compliance efforts.
  • Keyless Encryption and Hashing Techniques: Many fintech startups explore keyless encryption and hashing techniques to secure sensitive financial data effectively. These techniques enhance the authentication process for online transactions, ensuring seamless and secure economic transactions for users.
  • Leveraging Blockchain Technology: Fintech startups leverage blockchain technology to prevent financial crime by creating tamper-proof records of financial transactions. Blockchain provides a secure way to transfer money, reducing the risk of fraud and enhancing overall transaction security.

Along with the technologies, fintech startups must also use a risk-based approach that includes thorough risk assessment during customer onboarding and regular monitoring of financial transactions.

Ensuring Safety Within the Fintech Industry

While fintech can help prevent financial crimes, the industry is not immune to the risk. Hackers can abuse advancements like fast online transactions. Fintechs must exercise abundant caution to prevent economic crime, such as money laundering, terrorist financing, corruption and bribery.

It is also imperative to balance regulation and innovation. Fintech startups must proactively manage their vulnerabilities and help shape the regulatory landscape. This is where business incubation centres like T-Hub come in. The best way to prevent fraud in the fintech industry is to invest in building a fraud detection and prevention unit that monitors the market and flags unusual incidents or situations. The industry must also make sure that it constantly updates itself to stay ahead of potential threats.

As fintech continues to evolve, more innovative solutions are expected from fintech startups to help combat financial crime. With their technological prowess and mass appeal, startup accelerator programs help fintech startups make an ideal safety partner for traditional financial institutions. Ultimately, it helps curb financial crime by making financial processes more secure.