The digital economy saw 2021 as a year of transformation and trends in global finance are moving at a fast pace.

The metaverse, also referred to as the decentralized web or “Web3,” is a new configuration of the World Wide Web. It promises to allow users to build and own platforms and apps and buy and sell goods to like-minded users.

As expected, some of the first to lay foundations within this space are among the world’s most renowned tech giants. Facebook (rebranded as Meta), Microsoft, Nvidia and Epic Games have all staked claims. This broad shift in how we interact with technology will present new opportunities, as well as new risks.

So, what changes can we expect to see in 2022? Even more important: is the banking space prepared?

Prediction #1: Fraudsters Will Take Advantage of Web3

Stolen identities and financial details could be more readily available within the metaverse than on previous versions on the web. This would give fraudsters more scope to exploit the digital economy.

With the growth of digital assets, including high-value NFTs, there is also exponential growth in the number of microtransactions dominating the gaming industry. Skins, memes, costumes and other downloadable content known as DLCs are all examples. Platforms where digital assets hold lower value tend to be the preferred stomping ground for testing stolen financial details. Once they succeed, this will pave the way for purchases of the more valuable assets to be fraudulently approved, potentially causing massive damage to merchants in the form of chargebacks.

To combat threats, merchants using the metaverse space will need to apply additional Know Your Customer (KYC) checks. This should happen upon opening accounts, and also periodically over the customer lifecycle. Creator monitoring will also be essential.

Merchant monitoring solutions are tools that companies could apply to overcome these problems. We expect that those within a porous Web3 environment will need to take this approach to tackling fraud. The biggest challenge we foresee is achieving regulatory oversight within the metaverse during its debut years, especially as the environment becomes more interoperable than previous spaces.

Prediction #2: Merchants Will Struggle to Identify Fraudulent Buyers

Customers are becoming more concerned with protecting their data. We expect to see a rise in the use of VPNs in an attempt to conceal their IP addresses.

This trend will grow with the increase of the number of fraudsters, which improves the transaction risk score. Unfortunately, fraudsters are becoming more sophisticated in posing as genuine customers to avoid being detected.

It will be challenging for merchants to verify buyers’ identities in this context. There are some solutions, though. For instance, tracking the Good User Approval Rate will test how easily vendor solutions identify good and bad transactions. Proxy piercing technology may also help identify criminals hiding behind technologies meant to protect consumers.

Prediction #3: New Regulations Will Create Higher Compliance Costs

The 6th Anti Money Laundering Directive (6AMLD) is a new ruleset rolled out throughout the European Union in 2021.

Failure to comply with anti-money laundering regulations can result in substantial fines and loss of reputation. Record fines were handed out in 2021, with breaches worldwide. Year over year, rules become stricter, and we predict that due to recent expanding AML efforts, the number of penalties for financial crimes will increase in 2022.

The AMLD6 sees aiding, abetting, inciting, and attempting money laundering as offences. Innocent companies could be used as a pass-through by criminals to conduct this activity. As a result, they may unwittingly be seen as accomplices, aiders and facilitators in illicit activity and, therefore, feel the brunt of the law.

Not everyone will be hit, of course. Merchants who manage to avoid any fines will be those who have the advantage of transaction monitoring. Screening for sanctions and Politically Exposed Persons will be a vital practice.

Prediction #4: Algorithms Will Provide Early Fraud Identification

There has been a recent surge in the use of fake identities, as sensitive information continues to be readily available on the dark web.

For the fraud community, impersonating buyer behaviour and passing KYC checks is becoming second nature. It is the prime cause of the fraudulent purchases of gift cards, Buy Now Pay Later schemes and microtransactions within the online gaming sector. But, after a marked increase in online fraud in 2021, we expect to see a further uptick in identity fraud in 2022, which will put severe pressure on eCommerce. So, what measures are being used to fight back against the fraudsters?

This year we expect a wider use of sophisticated machine learning systems (ML) as a way of keeping up with fraudsters. They’re automated, they learn, they adapt, and they can handle thousands of payments each second. This approach, driven by artificial intelligence, will deploy algorithms to pinpoint the increased probability of fraud. This will ultimately allow companies to keep up with the fraudsters as they continue to change tactics.