Role of Fintech Startups in Combating Financial Crime

Financial technology (fintech) is one of the most significant innovations of our times. In a short time, fintech has made itself indispensable for the financial sector. It has been revolutionising the financial sector by enhancing security and efficiency in a way that traditional financial institutions cannot. With ground-breaking solutions like UPI, e-wallets, digital banking and instant online loans, fintech is changing the dynamics of modern finance as we know it. It has also shifted priorities from financial institutions to customers. While making financial services more accessible and convenient to customers is indeed the goal, financial crime is also on the rise.

Despite preventive policies and security protocols, financial crimes have remained an issue for the economy both at global and regional levels. According to the Global Economic Crime and Fraud Survey (GECS) 2022 by PwC that surveyed 1,296 organisations worldwide, 40 per cent of the organisations lost between USD 50,000 – 100,000, 17 per cent lost between USD 1-50 million and 5 per cent incurred a loss of USD 50 million and more due to fraud or crime. In India alone, 52 per cent of the organisations experienced some form of fraud or other economic crime during the past 24 months. Fintech startups can help the sector by developing tools and technologies to detect and prevent financial crime. 

Strengthening regulatory compliance

Financial institutions need to comply with a wide range of regulations to prevent financial crimes, such as money laundering and terrorist financing. Fintech startups can help financial institutions meet these regulatory requirements by providing them with the necessary tools and technologies. They can develop tools like compliance management systems to automate the transaction monitoring process for suspicious activity, making it easier for institutions to observe all the regulations effectively.

Making financial processes safer

Financial technologies can prevent fraud by adding more layers of authentication and verification for every transaction. Encryption technology has especially proved game-changing for the sector. Fintech has also helped eliminate intermediaries, thus making transactions cheaper, faster and seamless. By using technologies like artificial intelligence (AI), machine learning, data analytics and blockchain technology, fintech startups are coming up with innovative tools to make financial processes more resilient. Such tools can detect risks of fraud, identity theft, money laundering and other financial crimes before they even occur and alert customers/authorities in the event of suspicious activity.

Fintech startups are using a range of advanced technologies to enable safe transactions.

  • Advanced data analytics, machine learning and artificial intelligence are already being used by fintech startups to enhance financial safety. These technologies can help identify suspicious transactions, detect money laundering activities and ensure compliance with anti-money laundering regulations. They enable quick and precise detection of suspicious patterns, such as large sums of money being transacted in a short period of time indicating money laundering or fraud.
  • Fintech startups have made financial systems safer with the use of biometric technologies, such as facial recognition and fingerprint scanning. These technologies help to confirm customer identity, thus preventing impersonation and fraud via identity theft. By requiring customers to provide biometric information when opening accounts or making transactions, fintech startups protect users from fraudsters and cybercriminals.
  • Startups can build automated systems like AML Transaction Monitoring to automatically scan transactions and detect unusual financial activities more precisely and create rules and scenarios based on the risk level.
  • Many fintech startups are now working on keyless encryption and hashing techniques as they provide greater security of sensitive financial data. These techniques could help create more seamless authentication processes for online transactions.
  • Fintech startups can also leverage blockchain technology to prevent financial crime. It can be used to create a tamper-proof record of financial transactions, thus providing a more secure way to transfer money, reducing the risk of fraud.

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 industry

While fintech can help prevent financial crimes, the industry itself is not immune to the risk. In fact, advancements like fast online transactions can be abused by hackers. Fintechs themselves must exercise abundant caution to prevent financial crime, such as money laundering, terrorist financing, corruption and bribery.

It is also imperative to balance regulation and innovation. Fintech startups must take proactive steps to manage their vulnerabilities and help shape the regulatory landscape. 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 to come from fintech startups to help combat financial crime. With their technological prowess and mass appeal, fintech startups make an ideal partner for traditional financial institutions to help curb financial crime by making financial processes more secure.