How to Survive an Economic Crisis with the Right Fraud and Risk Processes

Economic downturns and an increase in fraud go hand in hand. It happened during the great recession in the 1920s, in 2008, and during the COVID crisis starting in 2020. You don’t have to be clairvoyant to predict if it will happen again in the next few years, during another recession.
Ravi Sandepudi

Ravi Sandepudi

September 15, 2022

During the last few months, a gloomy outlook started to emerge on the horizon of the financial and fintech world. Not a single week passed without a VC urging their portfolio companies to save costs, protect the runway, and expect fundraising to become much harder over the next few years. Many companies started laying off people or facing down rounds. Take Klarna as an example. As one of the biggest VC-backed fintech companies in the world, it had a 10% layoff and faced a valuation cutoff of 20-50%. 

With so many things to worry about, should you review your fraud and compliance processes right now, you might ask?

We at Effectiv, have seen multiple economic downturns and their impact on fraud for customers over the last two decades. Ravi, Effectiv’s co-founder and CEO, started his career in fraud prevention at Google at a time when a recession led to a massive fraud wave. During the global COVID pandemic, when an economic downturn combined with rapid digitization, fraud attacks increased massively everywhere. The first go-to is usually to increase the return on investment or improve cost efficiencies by removing an offering or by cutting the cost by dropping a market or laying off people, as we are seeing in current economic winds. The whole Effectiv founding team during this time protected some of the biggest financial institutions and fintech companies in the world while leading fraud and risk teams at PayPal.

Economic downturns and an increase in fraud go hand in hand. It happened during the great recession in the 1920s, in 2008, and during the COVID crisis starting in 2020. You don’t have to be clairvoyant to predict if it will happen again in the next few years, during another recession.

Since possibilities for fraudsters have fundamentally changed over the last years, this time, things could even become much more challenging. Today, everyone who wants to can learn how to commit online fraud within hours. The tools and resources are freely available and easily accessible. With the latest surge in Fraud-as-a- Service (FaaS) offerings, everyone who wants to supplement their income by committing fraud can do so without any prior knowledge.

Here are a few helpful tips that you should do right now based on what we have learned from similar situations in the past.

 

Automate your fraud and risk processes to increase efficiency and launch faster

The prerequisite for every successful fintech is to be compliant with existing KYC and AML/BSA regulations. Chances are that you already have a compliant onboarding and screening process in place, however, many organizations we work with still rely on primary manual steps. There is nothing wrong with being hands-on. After all, the value of a new product needs to be proven first. Where it becomes challenging is when your new product hits a bit of traction and customers sign up faster than you can process. In this situation, the manual process becomes a bottleneck and customers get stuck in onboarding queues. The result is a poor customer experience and the wait time for new users to experience the value of your service increases dramatically. And, your growth suffers inevitably. In those situations, you can hire more people which results in a linear cost increase. 

Never compromise on your compliance processes though, since that can lead to regulatory fines or worst case, shut down of the entire company.Instead, review for potential bottlenecks and where you can automate better. In the last few years, intelligent, automated compliant onboarding has emerged that ensures a seamless customer onboarding experience while protecting from fraud. Those, data-driven onboarding solutions should be flexible enough to support your current processes and ensure that you can scale with the same team size, once you hit growth.

 

Rethink your onboarding process for cost-saving opportunities and optimize your customer experience

If you have already automated parts of your onboarding and customer screening process, you are already a big step ahead. In the past, we have seen the significant potential for cost savings and improved user experience in organically grown onboarding processes based on inflexible tools. In times when everyone needs to optimize their runway, you can find significant savings in your KYC/KYB and CIP processes without compromising on quality. 

The principles behind it are simple. Risk profiles vary from customer to customer. Many external data services are expensive but have cheaper pendants. There is no need to spend tens of dollars for onboarding each account if a much cheaper data source would have identified this account as risky or non-compliant for a just few cents right at the beginning of the onboarding journey.

The same is true for the customer experience. You can expect that the vast majority of your applications come from genuine users. Those users should have the least amount of friction in their process. Only applications with a higher risk profile should go through a more rigid screening process. The power of conditional execution and smart customer routing can be a real game-changer here. In rare cases where a manual review for an application is necessary, your team should have all the information at their fingertips for fast decision making. To date, the average fraud and compliance analyst still touches 4-6 different tools to complete a review. That’s a big cognitive overhead.

With intelligent, machine learning-driven processes and the ability to call costly services only when necessary, we have seen companies save significant customer acquisition costs while speeding up the onboarding process at the same time.

 

Identify fake accounts and artificial growth to mitigate a real risk for your startup’s valuation

Right after Elon Musk announced he is going to buy Twitter for $44B, he quickly backpedaled accusing the social media platform of hosting a significant amount of bot accounts. Earlier this year, PayPal’s valuation dropped by almost 25% after revealing that 4.5 million accounts were potentially fake. Although these are more extreme examples, the problem is highly systematic. Fintech companies were vying for customers’ attention for years and a surplus of cash and funding led to a steady increase of incentives to lure customers to sign up. This opened the door for fraudsters to create an armada of fake accounts to just rake in the signup bonus. Once you start pitching to investors, this can become a real issue. Especially in B2C fintech, customer growth is still one of the key metrics. However, how much is that worth if a significant amount is non-genuine users? 

We expect investors to become more rigid in funding due diligence in the next few years and have a close eye on how much of the growth of a company is real, and what is fueled by bots. Lots of those non-genuine signups can easily be identified automatically at the time of signup. We also suggest analyzing existing but dormant accounts and doing rescreening for fraud and risk flags. Even if you might end up with a lower number of real user accounts and have to realize that some of your recent growth is based on fake accounts, you now have a solid data foundation for real funnel optimization and can go into your next funding pitch with confidence.

 

Have a strong partner that knows what to anticipate next

Over the last decade, we have also learned that it is key to work with people who have been there and know how to traverse the space during a crisis. The upcoming uncertainty is scary, but if you are working with people who have navigated it before, it is much more manageable. During the last few years, we had the chance to solve some of the most challenging fraud and compliance challenges and were lucky enough to learn from some of the best people in the space. Besides the right tools at your disposal, working with the right partner and team is always a key success factor.

Therefore, even if you don’t see an issue right now, ensure that you have people to consult with who know your situation. If you become a target for fraudsters once your company is successful, you’ll have the ability to call up the right people at the right time when you are in that type of situation.

The time ahead might look scary. However, difficult times often present tremendous opportunities. With low-cost operations, a long runway, a superior customer experience, the ability to launch new services fast, and the right partner at the side, your company will navigate through the storm and emerge stronger out of it. 

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We at Effectiv are committed to helping fintechs and financial institutions during these challenging times. Our team has more than 50 years of combined experience in building fraud and risk systems and we have helped a plethora of companies while working for Google, Similtiy, Walmart, and PayPal. Now, we’ve developed flexible, intelligent risk and fraud solutions that help you optimize the customer experience and save costs without ever compromising compliance. Effectiv solutions are ready-to-deploy and can be up and running in just a few days. 

Resources:

https://www.fico.com/blogs/fraud-covid-19-lessons-learned-2008-recession

https://www.finextra.com/newsarticle/39630/paypal-reveals-45-million-accounts-were-illegitimate-shares-plummet

https://www.forbes.com/sites/jeffkauflin/2022/02/02/paypal-admits-45-million-accounts-were-illegitimate-as-fintechs-fraud-problem-grows/?sh=694cc34736b9

https://www.ft.com/content/b5b7d26c-2407-4845-8276-ef5da20f778a

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