Risk and fraudand its important role in stimulating financial inclusion

The evolving banking and payment industry has accelerated the banking movement, enabling more users to access financial services. Now, we advance towards a ‘new wave for financial inclusion’ as users start fully leveraging solutions and accessing insurance, investment, credit products, and more. In this new scenario, fraud prevention still plays a key role in driving access to products and the use of electronic means.

Considering that context, we invited Fabricio Ikeda, Head of Fraud Protection and Compliance for Global Partners & Alliances at FICO to talk about the main issues that connect the themes financial inclusion e prevention of fraude. Check out how our conversation went.

How do you see fraud prevention in terms of driving true financial inclusion?

Fraud prevention has everything to do with financial inclusion: it contributes to accelerating the acceptance of new customers, serving a population that would not necessarily be covered if a secure payment method were not available, and democratizing financial products.

There are several examples to illustrate this relationship, such as the use of cash, which for security reasons was not carried in large amounts by the consumer. In contrast, today we have instant payments such as Pix that fulfill this role in the daily lives of the population, and this only happens because there is a guarantee that the payment is made, that the channel is secure and the transaction does not expose the user.

Also, we already know that making sure security is in place is essential for financial payments in Latin America. According to a study conducted by FICO, 74% of Brazilians agree and understand that authentication requirements aim to protect them from risk. It is ingrained in our culture that fraud verification helps us leverage financial products and services.

Read also | Deepfake fraud: Threat in means of payment requires robust antifraud solution

Is it possible to say that there’s a connection between an accelerated banking movement and growth in fraud?

There is a connection, but it’s not as big as we imagine. There’s growth in cases related to means of payment and to the fact that fraudsters have expanded their attack portfolio.

But these attacks have increased in general, they are not focused on the specific portion of the population that had access to the financial environment. Even because the financial institution they are aware of possible weaknesses and how the client uses the services, in addition to investing in a very strong awareness process.

Showing that vulnerability is not exclusively associated with that new group, some preferences are similar no matter the user’s age, gender or social class in financial services. For instance, on using authentication means in Brazil, fingerprints are the most accepted ones by 64%, face recognition by 61%, SMS by 24%, and so on so forth. There are slight variations, but generally speaking, we see common preferences within a variety of layers for the population when it comes to protecting their assets.

Nowadays, it is common for fintechs and companies from outside the industry to build their own financial units. What should they consider when it comes to fraud prevention and user protection?

The Brazilian financial universe is one of the most advanced in the world, considering all the technology and solutions we have. And for some time now, we have had companies that were not used to offering financial services starting to work with this possibility through the phenomenon of embedded finance.

The biggest challenge is the lack of maturity for joining a new industry without years of experience that traditional banks already have. So the fraud and risk mitigation issue ends up becoming a secondary or sometimes even tertiary priority for new players, when in fact it should be an essential part of their business model.

Inherent risks must be considered by design for new products and services that those companies will market. It only takes one issue for financial losses as well as reputational risk to compromise businesses.

Again, the same study by FICO has shown that 80% of Brazilians would change their service provider if they were involved in a corruption or money wash scandal.

And what are the consequences from fraud prevention concerning customer experience so that new financial service users stay engaged?

There is certainly an impact of fraud prevention on customer experience. Nobody wants to make a genuine transaction and have that transaction improperly declined. And that goes for all parties involved. On the business side, everyone wants the transaction to go through in order to generate more business.

Even if it is properly unauthorized, there’s an issue on how to deal with those situations and show the user that it occurred due to fraud risk concerns. It involves transforming an experience, which was initially negative due to an unauthorized transaction, into a positive one by making the client aware that the institution is protecting their personal interests.

In Brazil, when faced with a transaction unauthorized inadvertently, 12% of the users would consider changing their service provider in case of an online transaction. In case of a face-to-face transaction, 15% of them would consider a change. The global average is a few percentage points above that, which shows that Brazilians are a bit more flexible.

Anyway, this also reflects our reality. Today we operate everything in seconds. Nobody likes to wait for an app car for more than five minutes, imagine carrying out a transaction with credit card products or Pix and having to wait XNUMX seconds or a minute to validate it. So all of that affects the customer experience a lot.

Are there significant differences among Latin American countries in terms of fraud prevention and user experience?

In Latin America there are small variations when we think of credit or debit cards. As for the question of instant payments, Brazil stands out with the Pix. Even some countries in the region are starting to talk more with the Brazilian Central Bank to understand our success story.

Mexico had already implemented its instant payment system (CoDi) before the Pix and even so, Brazil surpassed in terms of numbers and agility in implementation. Why do I bring this? To say that Mexico has its particularities, as well as Peru, Colombia, Chile, Ecuador and other countries.

There are also slight variations in scam methods, type of unauthorized access to digital channels, forms of opening fake accounts, etc.

What’s your take on the different levels of banking and use of cash in Latin America?

We still face a challenge of the high use of cash in countries like Mexico and Colombia. I see great opportunities in initiatives for financial inclusion and banking, as well as other examples we’re able observe, such as Brazil.

Looking beyond Latin America, we have a case in Africa, which shows many transactions made on the user’s phone. I bring that example up because financial inclusion also has to consider the technology available, location, culture and user experience. That’s the case for WhatsApp, which is very popular in Brazil and not that much in America—which means it also has to do with the cultural aspect.

Read also |Instant payments in Argentina: Perspectives for Transferencias

Comparing to Latin America and the rest of the world, do you see more specificities in our region regarding fraud prevention?

Apart from cultural differences, the social and economic moment Latin America goes through right now is a little diverse in comparison with more established regions in the world. Most of the countries here are developing ones, so we have an issue related to financial maturity. And as we’ve already mentioned, public security is also an important factor for fraud prevention or the banking movement.

How does one of the most relevant financial institutions in Latin America work on fraud prevention? Learn about the XP case (in portuguese):

FICO has a solution focused on credit risk assessment. How does your company see credit when it comes to financial inclusion?

FICO aims to work on financial inclusion from the ESGstandpoint, in the social context of accessing alternative data so that we can include a population that wasn’t properly seen in the past.

When there’s a need to query any kind of information for a natural person, it is important that they have a credit or financial history so that we can have it on the books, whether it’s positive or not. But what happens to populations that don’t have any kind of financial information available?

That is the main question we’re trying to answer by using alternative data. For instance, if a person works with a delivery app, we can understand that they generate revenue and come up with a score to proactively offer a loan at an affordable interest rate.

The fact that this person is not financial included doesn’t mean that risk is too high and that they need to suffer with rates that are uncommonly high in the industry when accessing credit. So in the sense of financial inclusion, the role FICO plays involves offering credit in a more democratic manner.

Read also | Credit industry in Latin America: 4 opportunities for driving the industry

Dock & FICO together to accelerate financial inclusion

FICO is our partner in offering a anti-fraud solutions with the best technology on the market, delivered in an innovative, accessible and pay-as-you-go model.

We work together so that banks, fintechs and companies of any size or industry can provide high-level protection as they take their first steps in offering financial solutions—and as their clients leverage them.

Learn more about our and technology Fraud Prevention and how we contribute to driving inclusion through fraud prevention:

Financial inclusion and fraud prevention: Takeaways from this article

• Fraud prevention accelerates the process of taking new clients, serves a part of the population that wasn’t necessarily served if there weren’t secure means of payment available and democratize financial products;
• While financial inclusion opens doors, there’s more risk exposed and more fraudsters looking for vulnerabilities in the banking system;
• Fraud and risk mitigation ends up becoming a secondary or sometimes even tertiary priority for new players, when in fact it should be an essential part of their business model;
• In Brazil, when faced with a transaction unauthorized inadvertently, 12% of the users would consider changing their service provider in case of an online transaction. In case of a face-to-face transaction, 15% of them would consider a change;
• Financial inclusion also involves the technology available, location, culture and user experience;
• The fact that a person is not financial included doesn’t mean that risk is too high and that they need to suffer with rates that are uncommonly high in the industry when accessing credit.

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