The Era of Digital Crime: Can Financial Institutions Combat the Increased Risks?

Gabriella Brignardello
6 min readJan 6, 2022

By @txzhuo and @gabrignardello from @fikavc

In today’s ‘digital-first’ world, financial institutions are transforming existing processes and adopting new technologies to remain competitive. At face value, this shift may sound entirely positive; however, ‘going digital’ presents many new challenges — primarily in security and compliance. And, unfortunately, the accelerated pace at which the industry is transforming has corresponded to new levels of digital financial crime.

Why are digital financial crimes increasing?

As the pace of financial digitalization has outpaced change in financial institutions’ risk management systems and processes, institutions have been left ill-equipped to handle new vulnerabilities.

One of the main accelerators of financial institutions’ digital transformation has been a growing consumer reliance on online/mobile financial services. 80% of consumers surveyed in Chase’s 2020 Digital Banking Attitude Study indicated a preference for managing money digitally. However, this shift in consumer preferences and the broader technological overhaul in the financial industry have been years in the making. Remember: the first version of the PayPal electronic payments system was launched over 20 years ago in 1999, and Venmo over a decade ago in 2009.

What drastically sped things up was COVID-19. Stay-at-home orders and social distancing guidance forced financial institutions to ‘go digital’ for all customer communications and most in-person services almost overnight, solidifying digital banking as the new norm. It’s estimated that in 2021, 4.6 million U.S. consumers will have opened digital accounts at traditional banks, and by 2024, 80% of the population will be a digital banking user (2021 Insider Intelligence).

Fortunately, existing technologies have made it easier for financial institutions — who have historically been highly business-minded — to become more customer-centric and prioritize creating personalized online experiences that keep end-users engaged. However, in exchange, these institutions must protect immense amounts of customer data and prioritize fraud prevention and detection more than ever before.

This responsibility has proven challenging for financial institutions as digital fraud has notably increased with the rapid rise in online/mobile transacting and banking. TransUnion research found that the percentage of suspected digital fraud attempts in financial services increased 149% globally and 109% in the US when comparing the last four months of 2020 to the first four months of 2021. This trend will only continue as financial institutions engage in more partnerships with fintech companies and embrace technologies like cryptocurrency, further driving up security and compliance spend.

Where do current approaches to combatting digital crime fall short?

In 2021, global financial services companies paid an estimated $181B in compliance costs. However, as fraud attempts continue to rise, it’s becoming evident that financial institutions are spending money on the wrong approach.

Rather than invest in compliance and risk-management technology, financial institutions continue to throw headcount at the issue. Staffing is the single largest compliance costs driver, with labor making up 57% of global distributed compliance costs. Beyond the massive cost, this approach also negatively impacts employee retention and productivity rates — a staggering 67% of compliance managers reported concerns over employee satisfaction.

Increasingly complex regulations have exacerbated the situation. Global connectivity means that institutions must keep up with regulatory change across many regions, making due diligence processes more time-consuming and, thus, more expensive. According to a LexisNexis report, the average time required to onboard a mid-sized business has increased from 21 hours in 2017 to 36 hours in 2019.

Clearly, compliance is moving beyond what human financial teams can handle manually, and the flow of regulatory change and new data is only going to continue to increase. Instead of onboarding more staff, financial institutions need to focus on supporting and empowering existing employees with the right software. By using third-party solutions to automate certain workflows, these teams will be freed up to focus on other essential functions.

A Solution: Building a digital crime-fighting software toolkit

When used together, various cloud-based software providers — that leverage cloud computing, big data, and AI — can fortify financial institutions against digital crime. With this toolkit, financial institutions will be able to implement robust compliance strategies and secure their digital finance platforms at a lower operational cost.

The following five use cases and example software providers demonstrate the advantages of this approach to preventing and fighting digital crime:

1. User verification is critical to ensure all application requests are from authentic sources, thereby detecting and preventing fraud. Players in this space, such as Veriff and Berbix, use device analytics and liveness checks, or more traditional photo ID verification to ensure customers are real and help spot patterns.

2. Onboarding can be made more secure for banks and fintechs and seamless for customers when automated identity decisioning and KYC compliance solutions are used during the customer application and approval process. Two examples of providers who offer this capability are Alloy and Jumio.

3. Once customers are onboarded, banks and fintechs must employ monitoring and case management workflows to address money laundering, fraud, and compliance violations. Unit 21 and NICE Actimize are examples of companies that offer suites of tools that include transaction monitoring, analytics and reporting, as well as customized risks investigation workflows that ease the burden of financial crime detection and prevention.

4. Regulatory reporting is a pain point for banks and fintechs, but is nevertheless required for compliance programs. To drive down costs and improve accuracy, platforms, such as Fiserv and Hummingbird, have created solutions that streamline and automate the creation, validation, and filing process for regulatory reports, while also offering business analytics and customer intelligence with compliance insights.

5. Lastly, investigations and enhanced due diligence (EDD) is one area of financial compliance that has yet to see widespread innovation and thus a major opportunity for fintech development. To be proficient at investigations, financial institutions need to apply data analysis and machine learning techniques; however, most are in the early innings of adopting this approach to EDD. Two players that currently serve financial customers in this capacity are Comply Advantage and MinervaAI.

  • Comply Advantage offers an anti-money laundering (AML) data solution that uses artificial intelligence, machine learning, and natural language processing to deliver streamlined KYC screening and risk scoring functionality. However, compared to MinervaAI, Comply Advantage is a bit more limited in its EDD capabilities.
  • MinervaAI is a turnkey solution that augments and automates EDD processes, drastically reducing the costs of traditionally manual investigation workflows. MinervaAI ingests data from a variety of diverse sources (i.e., global news publishers; screening watchlists; social network sites; legal, criminal, and business data) and then applies advanced context, sentiment, and risk recognition algorithms to identify clients and the relevant risk.

Where do we go from here?

Total digital transformation is upon us and financial institutions must learn to adapt. The ever-increasing amount of digital crime will require legacy and new institutions alike to adjust their mindsets and embrace new technologies that will not only help them better serve their customers, but will also keep their platforms secure and compliant. While it’s difficult to find a ‘one-stop shop’, with the right assortment of cloud-based solutions, financial institutions can develop robust risk management processes fit for this era of digital crime.

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Gabriella Brignardello

Seed investing @ Fika Ventures, Founder @ Mi Casa de Angeles | Previously @ WndrCo, Parthenon