The pandemic has radically reconstructed the way we live, work, play, pay and get paid. With digital taking center stage across the board, businesses have been forced to adapt, reprioritize, and restructure their business models.
If we look at the digital payments sector, we have witnessed unprecedented growth in the last year, something that we typically see in three to five years.
According to a recent report, the global digital payments market is expected to grow from $29.66 billion in 2020 to $32.27 billion in 2021 at a compound annual growth rate (CAGR) of 8.77 percent. The market is expected to reach $46.94 billion in 2025 at a CAGR of 9.83 percent. India is also witnessing an increase in digital payment adoption as per a recent study by KPMG.
Along with advancements in technology, we are witnessing the concurrent emergence of more organized forms of fraud and cybercrime. Scammers and fraudsters are increasingly deploying leading-edge technologies and advanced algorithms to access financial and personal information. According to the Global Tech Support Scam research by Microsoft, three out of five consumers have encountered a tech support scam in the last 12 months globally and one out of six consumers were tricked into continuing with the scam, often resulting in victims losing hundreds of dollars.
Cybercriminals are constantly looking at innovative ways to make users fall prey to phishing attacks and identify thefts. In fact, a report by Accenture suggests that cyber attackers are changing their approach from simply stealing data to destroying or altering it to create distrust amongst businesses and consumers.
These developments erode Trust in businesses. Building Trust by offering personalized experiences for our customers while managing Risk is a key priority for any organization today, especially one in the FinTech space.
In the next few sections, let us look at the key aspects of managing Risk with the FinTech lens.
Risks have evolved and become more sophisticated
Over the last two decades, the FinTech landscape has evolved, so have the risks. As I am sure most readers are familiar, the broad categories of Risk are Credit and Fraud. If we overlay the Trust factor, two risks that most companies spend significant effort to manage are, firstly, fraudsters stealing your credentials and getting access to your account and secondly, when fraudsters have access to someone’s identity, and they use those credentials to create an account and transact.
On the credit front, we are all familiar with consumers' inability to payback, and equally importantly merchants’ inability to service consumers.
During the pandemic, as we see in most crises’ situations, we saw increased fraud risk and credit risk. Given the tough economic situation the expectation was that credit risk would go up as both consumers and merchants struggled, consumers with loss of jobs and merchants with loss of business with most cities being in lockdown. However, as we have seen over two decades, this is an opportune time for professional fraudsters as well to exploit loopholes, launch massive fraudulent schemes, and drive higher fraud risk.
As cliched as it may sound, the foundational investment that one needs to make to reduce Risk is on Data. As data scientists look for patterns to mitigate bad actors, they rely on Petabytes (1 million GB) of data which include billions of events, customer journeys, transaction history, and buying patterns, the list is endless.
An interesting change in approach that began a decade ago at PayPal was to focus on enabling a frictionless experience for our GOOD customers. As simple as it sounds, you will NOT be surprised to learn that most of us think of BAD when we think of Risk management.
Almost all companies, including digital payment firms, leverage data with cutting-edge algorithms to enable good customers to transact without friction. Simply put these models process large amounts of data and decide in milliseconds to allow a transaction, to offer a line of credit, allow a customer access to accounts.
We have evolved our Data Science strategy over the last two decades. We have invested in clean and good data while anticipating changing business trends. Our Data Scientists have the flexibility to leverage cutting-edge algorithms to create best in class models and lastly, our technology teams have created a robust and scalable platform for us to build, deploy and run these models at blazing speeds.
This investment is crucial for driving Trust. As technologies swiftly evolve, so do cyber criminals and identity imposters. Fraudsters not only use stolen identification but also create new, digital-only identities by putting together real and fictitious information. Fintech companies need to be on the constant lookout for such innovative fraudsters.
A balancing act: managing risk and offering a seamless experience
There is a fine line that most digital first organizations need to walk- managing risk while ensuring that good customers face minimum friction. We all should acknowledge that this is a journey. A robust business model coupled with investment in the right tools, people are paramount to stay on top of cutting edge advancements in machine learning and also to stay ahead of the fast-changing risk landscape as fraud trends keep evolving and model performance deteriorates.
The author, V Chandramouliswaran, is Senior Director, Global Finance Crimes and Customer Protection and Chennai Centre Head at PayPal. The views expressed are personal