Report outlines unique fraud risks facing the underbanked

Innovation in financial products designed for unbanked and underbanked people also means greater opportunities for defrauding those populations.

That is one of the key findings from Juniper Research’s study of online payment fraud, which also predicts that losses due to online payment fraud will exceed $343 billion globally between 2023 and 2027. Roughly one third of those losses will occur through money transfers and banking, the analysts said. By comparison, the Federal Trade Commission reported U.S. consumers lost $5.8 billion to fraud in 2020.

One force driving fraud losses up is that fraudsters are increasingly specializing their attacks to land larger payouts. Another, according to Juniper Research, is “fraudster innovation in areas such as account takeover fraud,” in which a criminal hijacks a legitimate account through credential stuffing, phishing or other methods.

But even as fraudsters seek larger payouts, the unbanked and underbanked — disproportionately people with lower income, as well as adults with less education and Black and Hispanic adults —need extra protection against fraud.

Juniper Research did not provide statistics in its white paper on fraud committed against underbanked people, and data about fraud against low-income people is scarce but concerning. For example, in the United Kingdom, Experian found in 2017 that fraud against struggling families had doubled in the previous two years.

To address concerns about fraud against low-income people in the U.S., the FTC started an initiative last year to encourage people with lower incomes to report fraud, an action Chairwoman Rebecca Kelly Slaughter said would help “ensure that FTC resources are available to those who most need them.”

Underbanked people tend to rely on alternative financial services outside of the banking system, so fintech companies have developed products to fill this gap, according to Juniper Research. These products include peer-to-peer payments platforms, buy now/pay later products and alternative credit scoring.

“With more innovative financial product roll-outs expected in the next two to three years, the fraud risk in this area will also grow,” the Juniper Research study says. “There needs to be an increase in the use of alternative data to identify fraud risk for the unbanked.”

The need for alternative data stems from the limited banking and credit data that financial institutions can access on underbanked people. Juniper Research said these alternative data sources include rent payment, mobile phone payment, employment and payroll information, utility bills and other payment or income data.

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Using these alternative data sources does not just make financial products safely available for underbanked individuals but can help monitor risk for existing customers as well, according to Jamie Moles, senior technical manager at the cybersecurity company ExtraHop.

“This helps financial institutions better understand their customer base and create more inclusive financial products, particularly for consumers that are in the thin-file or no-file credit categories,” Moles said. “Even big banks like JPMorgan are looking into new ways to validate customer risk beyond just the credit score.”

Some additional keys to enabling underbanked individuals to access financial products while minimizing the risk of fraud are focusing on the mobile channel to meet them where they are, and providing them transparency in the identity verification process, according to Christina Luttrell, CEO of the digital identity company GBG Americas.

Fintechs face a greater level of fraud risk because they are not necessarily subject to the same regulatory requirements as financial institutions, according to Lauren Kohr, senior director of anti-money-laundering of Americas for the Association of Certified Anti-Money Laundering Specialists. They sometimes come up with alternative identity verification methods.

The lack of verifiable financial data about underbanked people is not the only challenge to protecting them from fraud.

“The majority of the unbanked consumers are not as educated in financial products as this will be their first time to use them,” the Juniper Research study says. “They are more likely to fall for fraud scams and or become victims of malware and other fraud-enabling technologies. Fraudsters will take full advantage of this situation with more attacks.”

The solution the group offered is elevating the importance of fraud prevention within any digital banking interface by embedding security measures at all stages of design and development. The group highlighted biometrics and multifactor authentication as security measures to be adopted, as well as adaptive authentication, which presents the user with additional authentication steps based on various risk signals.

This lack of familiarity with financial products also necessitates education, according to Claire Conby, executive director and chief risk officer at the distributed ledger tech firm Billon Group.

“There is a lot to be said for educating the users to be alert to such scams and understanding the nature of these cyberattacks,” Conby said. “Explaining the risks in simple, easy-to-understand language is one of the most important first lines of defense against fraud. Describing how these scams typically occur and providing examples of red flags to look out for will enhance people’s understanding of how their information, and in this case benefits that one assumes they need, can be put at risk.”