Between 2020 and 2021, digital order volumes shot up 30% in digital good sales. There was a 25% increase in marketplace transactions, and more than 30% growth in hospitality and travel. This signifies rapid growth in demand from industries hardest hit by COVID19.

This is a fantastic sign in isolation. However, cybercriminals are paying attention, too.

Attempted payment fraud saw a 20% jump in activity during that same period, with nearly 70% divided between fintech digital goods and on-demand services. Among the sub-verticals hardest hit were third-party payments, with almost a 700% YoY increase in fraudulent transactions.

How Fraudsters are Abusing Automated Technology

What we’re seeing more frequently is that fraudsters know how to abuse AI technology to subvert standard fraud detection tools. They can gain access to greater troves of data, better infiltrate personal user data, and impersonate users.

A few common examples of these AI-enabled scams include:

• Smart Phishing: Fake emails targeted more effectively with AI technology.
• Deepfakes: Fraudsters using computer data to impersonate users with video technology.
• Account takeover fraud: Bad actors are using stolen biometric data to access users’ accounts.

These are just a few examples. There’s a plethora of malware algorithms that mimic data with near-perfect precision. These attacks can cost companies billions if used to their maximum capacity.

Aside from these, cyberattacks can harness the same machine-learning mechanism employed by anti-fraud agencies to probe any given network for weaknesses. Botnet attacks perform subtle surveillance on behalf of hacking groups to decide which targets are viable and which require additional efforts. If a company is deemed ‘crackable,’ criminal bots will monitor traffic from an infected source (servers, desktops, or laptops) to choose their targets.

Which Fintech Industries are Most at Risk?

According to recent findings, 2021 saw explosions in payment fraud via digital wallets, PSP, and crypto. The most significant surge was in remittance and so-called “neo-banks.”

Fraudsters are well aware that these subverticals have fewer built-in defenses to challenge them. As always, fraud follows the money. So, with these industries on the rise, leaps in fraudulent activity were a given.

Another key sector to watch is the “Buy Now, Pay Later” (or BNPL) space. This practice has become increasingly attractive to consumers of late. But, as you might have guessed, this popularity also makes the payment option more appealing to cybercriminals.

How Does BNPL Relate to Fraud?

Fraudsters love BNPL options. They can gain access to a BNPL account through phishing or other methods, or they may create false BNPL accounts using deep fake or other technologies.

Indeed, fraud risks double when it comes to BNPL payments because merchants can also be targeted. Plus, merchants may forget that their accounts are just as vulnerable to AI-led attacks as consumers are. Remember: wherever there is weakness and opportunity, fraud is sure to follow.

Since digital BNPL is a relatively new option, there is a decided lack of regulation and infrastructure to govern the process. As BNPL gains popularity, the urgency to implement solutions becomes more apparent.

Without necessary limitations, BNPL will continue to cause headaches in the fintech sphere. Adjustments to mobile wallets and contactless payments are a great place to start. Systemized regulation concerning return policies, consumer protection, and disclosure might be the balm BNPL needs most.

But even then, with record surges on both sides of the aisle, how can fintech keep up with AI-facilitated attacks? The answer may be artificial intelligence itself.

How Can AI Combat Fraud?

By implementing so-called ‘defensive AI,’ self-guided algorithms that discern user habits, device traits, and systemic patterns may be able to weed out bad actors in real-time.

According to Autonomous Research, AI technology will reduce operational costs for financial institutions by 22% over the next decade. Artificial intelligence enables users to analyze, tabulate, and incorporate data with inhuman speed and reckoning. In this way, AI saves time and money, especially in fintech, which holds reams of data it can’t articulate fast enough to meet demand.

AI can eliminate redundancy in a plethora of capacities. For instance, it can streamline the chargeback process by simplifying investigation and reconciliation systems. With the machine doing most of the heavy data lifting, disputes could be resolved in hours, rather than weeks. This leaves very little wriggle room for friendly fraud.

Currently, fintech institutions lack a straightforward method to distinguish between legitimate and illegitimate disputes. AI could bridge that gap by providing more efficient analytics and data communications between banks and cardholders. This would enable banks to tabulate industry trends and consumer data on demand, improving authentication and insight processes. With these metrics, banks can quickly recognize repeat offenders, analyze probabilities, and score disputes accordingly.

Introducing AI into the dispute process would alleviate much of the disparity between banks and merchants, which would improve working relationships and communication throughout digital commerce. With AI sorting data faster and more efficiently than any human, manpower can be redirected where it is best suited— in customer and B2B services.

Finding a Permanent Solution

AI facilitates faster communication between institutions, merchants, and card networks. This could be the key to less margin compression and a healthy payment ecosystem.

We shouldn’t forget that any newfound technological improvement will experience its fair share of hurdles and growing pains. How we respond to these difficulties will reverberate throughout the industry for years to come. Choosing to address inbound issues now, may allow institutions time to address and challenge these incoming difficulties with permanent and meaningful solutions.

So… what are you waiting for?

Want to learn more about how AI-enabled chargeback protection can help FIs save money and deliver greater value to customers? Click below and speak with one of our chargeback management experts today.