Risk of Fraud in Fintech Investments: Accelerating Digital Payments and Enhancing Security

I have been exploring the investment ecosystem with a special focus on trends in fintech, particularly digital payments. The tremendous growth of digital payments has unfortunately been accompanied by an increase in payment fraud. As a data analyst on the POS operations and business intelligence team at a major financial institution, I have looked into the solutions that cutting-edge technologies might offer. Additionally, I have also examined potential investment decisions. To maximize success, it is essential for financial institutions to join forces with fintech companies and benefit from the ensuing synergy. The fintech sector is one of the most lucrative sectors of the global economy. Currently, it makes up 2% of worldwide financial services income, and is estimated to rise to 7%, from $245 billion to $1.5 trillion by the year 2030. North America is predicted to be the most extensive fintech services industry globally, reaching $520 billion by 2030. Especially, the U.S. is anticipated to keep its place as a hotbed of fintech development and is estimated to make up 32% of total worldwide fintech income with a CAGR of 17%. The APAC region is estimated to take the lead in the fintech market by 2030, due largely to the growth in emerging countries like China, India, and Indonesia, which have many people who are not served by banking, large numbers of small and medium-sized enterprises (SMEs), and a growing group of tech-savvy youth and middle class citizens. It's projected to have a compound annual growth rate of 27%. The UK and European Union in tandem, form the world's third largest financial entity. Forecasts point to a Compound Annual Growth Rate (CAGR) of 29% in the Latin American market, headed by Brazil and Mexico. In Africa, South Africa, Nigeria, Egypt, and Kenya are among the countries expected to have a CAGR of 32%. In recent years, there has been an influx of venture capital into the fintech sector, leading to the development of fresh and revolutionary technologies. In particular, the emergence of SaaS organizations like Plaid, a streamlined API bank service which facilitates the linkage of users' bank accounts to applications and services, and Stripe, a payment processor (gateway) that enables businesses to receive Visa, Mastercard, American Express, and debit card payments, have been instrumental in this regard. Global fintech experienced a surge of ~20X revenue multiple in Q2 2021, although it decreased to 4X revenue multiple by Q4 2022. A BCG report recently revealed that fintech valuation multiples have dropped over the past year, leading to a decrease in IPOs and Special Purpose Acquisition Company (SPAC) listings. Unicorns created in the same period have gone back to pre-2021 levels. Q3 2023 brought about a new low for global fintech funding, with 1,655 rounds bringing in $29 billion, versus the 2,684 rounds and $54 billion of 2022. New trends are appearing which are intended to promote expansion and revolutionize the world of fintech, particularly in the area of digital payments. The swift growth of digital payments has become evident due to our more connected world. The COVID-19 pandemic has caused a considerable boost to the digital payment sector. According to the Boston Consulting Group, payments have been the focus of the majority of global fintech investments since 2000 with around 25% of all investments ($120 billion) being directed to this area. Cash usage has dropped by almost 4% around the world in 2022, due to the increasing acceptance of digital payments. The rise in electronic transactions has been a major factor in the overall growth of payment income, being as much as three times what it was. The expanding use of digital wallets is driving the boom in mobile payments. Juniper Research forecasts that the number of mobile payment users will reach 1 billion worldwide by 2024, in addition to more than $10 trillion in digital wallet spending by 2025. In the U.S., there have been widespread adoptions of tap-to-pay systems, such as Apple Pay, Samsung Pay, and Google Pay, already totaling an estimated $300 billion. Consumers increasingly desire the ease of making payments instantly, and research from the Federal Reserve Banks concluded that 80% of Americans are interested in faster payment methods. Fintech Futures predicts that the Real-time payment market should reach $86.89 billion by 2028, increasing at a CAGR of 32% from 2022 to 2028. McKinsey reports that the volume of cross-border payments has experienced a 13% growth in 2022 and hit a total of $150 trillion. On the revenue side, the increase was 17%, bringing it to a total of $240 billion. The majority of these funds (69%) were from B2B payments, with B2B and B2C payments increasing by 10%. Travel and e-commerce spending have driven the double-digit growth for C2B and C2C revenue. When it comes to business growth, cross-border transactions (both B2B and B2C) present a great opportunity, particularly in the consumer and SME segments - transactions with a value less than $100,000. These could include B2B (e.g. travel, healthcare, real estate, education, general e-commerce spending) or B2C (marketplace payouts, salaries, and social benefits). Since 2017, transactions with a ticket size of less than $1,000 have seen a dramatic increase of approximately 300%. Of this 80% of transactions are for less than $100,000 regarding consumer and SME (commercial cross-border) payments, thus creating a substantial chance for banks and nonbanks alike. Low-value payments generate around $12 trillion in global cross-payment outflows, forming roughly one third of total income. Despite the implementation of quicker domestic payment methods such as RTP and FedNow, customers also expect the capability to make and receive international payments around the clock, 7 days a week, 365 days a year. At present, services such as International ACH or SWIFT-based wire transfers may involve a wait of hours or even days before settlement is achieved. Although SWIFT and the Visa/Mastercard cross-border payment systems are being utilised, there is a demand to research and introduce fresh and advanced payment infrastructures that can broaden accessibility, decrease complexity and fees, all while increasing security. Last year, The Clearing House, EBA Clearing and SWIFT launched a pilot of the Immediate Cross Border Payments (IXB). The uptake of BNPL as an e-commerce payment method is on the rise, and is projected to reach a total of $306.8 billion in 2025. This is a considerable increase from the estimated $97.2 billion spent in 2020. A majority of the leading retailers have adopted BNPL, which is enhancing sales conversions as well as the spending habits of millennials and Gen Zs. Notable BNPL services such as Klarna, Shop Pay Installments, Affirm, After pay, Sezzle, and PayPal are driving the advancement of the BNPL payments sector. Biometric payments are an up-and-coming trend in which customers can pay with the use of facial recognition, palm scans, or fingerprints. Goode Intelligence estimates that the global biometric payments market will reach a total of $5.8 trillion and include 3 billion users by 2026. Companies have employed this on the rise trend to promote convenience and safety in payments. Analyzing the emerging digital payment trends and studying breakthrough technologies that may be utilized to handle payment fraud have become essential due to the great investment opportunity it presents. Making strategic partnerships between banks and the developers of these technologies would create a win-win situation. Due to the proliferation of digital banking and upgraded payment systems, payment fraud has been an increasingly concerning problem that detracts from the industry. According to LexisNexis, each dollar lost to fraud carries a price tag of $4.23 for business in the U.S. financial services sector. Data from 2022 shows a 79% spike in fraudulent documents when compared to the previous year. Juniper Research has reported that global e-payment fraud losses will amount to somewhere in the region of $343 billion between 2023 and 2027. Financial institutions (FIs) are witnessing a surge in fraud, and digital wallets recording the greatest uplift among all payment methods, such as Samsung Pay, Apple Pay, and Google Pay. In 2022, FIs who accept Samsung Pay have seen a 65% surge in fraud, 50% Apple Pay, and a 2% jump in Google Pay. This trend has caused FIs to become more susceptible to increasingly advanced forms of fraud and financial crime, creating new dangers and furnishing fraudsters with additional possibilities. Getting revenge for fraud or mistakenly sent payments is now more difficult, as these payments can't be reversed, making it harder for victims to recover their funds. In addition, swindlers can exploit the fact that immediate real-time payments are resolved right away to swiftly launder pilfered money via numerous pathways. As an illustration, credit cards possess a system that allows disputes, whereas the same isn't true for real-time payments.. Approximately 98% of the $6.9 billion of internet fraud in the US in 2021 originated from social engineering, as reported by the FBI's Internet Crime Center. This can take the form of phishing emails with a link that decreases an individual’s protection when clicked, or even someone impersonating a financial advisor and asking the user to install software and give their IP address and device ID. $50 billion is what merchants pay annually in relation to first-party fraud. This type of scam happens when a cardholder, intentionally or not, disputes a legitimate charge. A typical example is someone claiming they never received the purchased item, and then asking for a refund. What complicates matters is that merchants and issuers have lack of data to identify which cases are authentic fraud and which are first-party fraud. The introduction of faster payments has opened a new avenue for fraudulent activity known as an Authorized Push Payment (APP) scam, according to McKinsey. This type of scam is where somebody is duped into sending money to an individual posing as a legitimate payee but who is actually a fraudster. In these types of scams, the victim will be urged to send money to a bank account that is controlled by the fraudulent person. Scammers are utilizing social media to deceitfully solicit money from victims. They will often reach out via platforms such as Whatsapp and Instagram with a fraudulent offer of a promotion or giveaway that requires money to be sent beforehand. I have studied new technologies to front payment fraud which lower dangers and expenses while heightening efficacy and increasing the rate of transformation. Startups such as Sardine and Alloy offer novel solutions for combating fraud. Sardine, a fintech company, provides a comprehensive API platform for fraud detection and prevention, compliance, and risk management. It is equipped to recognize scams, variations in user behavior that might indicate fraud, and Anti Money Laundering activities on behalf of clients in the fintech industry. They have also pioneered a consortium to identify counterparties. To identify and discern fraudulent and legitimate transactions, the team utilizes payment and device data to create rules and implement machine learning models. Pymnts assert that with the surge of financial fraud, incorporating fintech firms into banking and collaborating with banks can be an invaluable chance. For banks, with their extensive and well-known customer base, embracing technology can better fraud security, increase customer satisfaction, and boost the overall customer experience. Statistics from the NY Department suggest that New York State financial and insurance establishments hold a collective sum of $8.8 trillion. As the largest base of Fortune 500 HQs, the state has seen # 2 ranking in fintech investment, amounting to more than $10.4 billion in venture capital funding and 502 deals concluded in 2022. The total number of active fintech startups is over 1,500, with 35 unicorns among them. Notable venture capitalists such as a16Z, Left Lane Capital, and Sequoia have relocated to or set up new offices in New York City. Given the prevailing market conditions, together with the leading and growing startups in the area, and the prolific networking of renowned VCs strengthening their presence in New York, promising opportunities await both companies and investors.

Source: https://c-koh.medium.com/fintech-investments-acceleration-of-digital-payments-increasing-the-risk-of-fraud-clear-3a9a1ed7693e?source=rss------fintech-5