The meteoric rise of digital payments over the past decade has been a double-edged sword. It has revolutionised convenience for consumers and created new business opportunities, but it has also opened a Pandora’s box of fraud risks. This growing threat landscape is set to significantly propel the growth of the fraud prevention market, which is predicted to more than double to $67 billion by 2028.[1]
Digital payments, encompassing everything from online shopping and mobile payments to e-commerce, have created a vast new playing field for fraudsters to exploit. These malicious scammers are growing in number and refining their strategies, employing ever more sophisticated methods, including account takeovers, synthetic identity fraud, and social engineering scams. In the UK alone, fraudsters syphoned off £1.2 billion in 2022, with almost 80% of app fraud cases starting online.[2]
As the financial toll climbs, regulators worldwide are stepping up, implementing stricter security and compliance mandates to safeguard the digital payment ecosystem and enforce corporate accountability in fraud prevention. The UK’s recent Economic Crime and Transparency Act 2023, which includes a provision to make businesses liable if they fail to prevent staff or a connected third party from committing an economic crime, is one such example.
Amidst this backdrop, where advanced fraud schemes meet tightening regulations, companies across industries have little choice but to elevate their fraud prevention strategies. Investing in advanced solutions that can navigate the evolving regulatory landscape and protect against increasingly sophisticated tactics has become more critical than ever.
Key benefits of digital fraud prevention tools
Real-time monitoring leveraging fraud detection algorithms
The power of modern fraud detection tools lies in their ability to monitor transactions and user behaviour continuously, in real time. By analysing vast datasets, these tools can spot anomalies that signal fraudulent activities, such as unusual spending patterns or suspicious login attempts, with greater accuracy and efficiency. This ensures enhanced protection against fraudulent activities while allowing legitimate transactions to flow smoothly without unnecessary interruptions or delays.
For example, by leveraging advanced artificial intelligence (AI) and machine learning (ML) to screen thousands of transactions per second, Sopra Banking Software has significantly reduced false positives by up to 85% for the company’s extensive global customer base of financial institutions. Sopra’s level of efficiency and accuracy in identifying fraud is something manual oversight cannot match.
Scalability and customisation
As businesses grow, so does their need for scalable and customisable fraud prevention solutions. Cloud-native digital fraud prevention tools are particularly adept at meeting these needs, offering the flexibility to scale with a business’s growth and the adaptability to respond to evolving transaction volumes and fraud strategies. These tools also enable businesses to tailor their fraud prevention measures, allowing for the integration of industry-specific rules and parameters that align with their unique risk profiles.
Partnerships such as Stripe and the British online food delivery giant Deliveroo showcase the immense value of such solutions. In a recent announcement, Stripe disclosed its role as Deliveroo’s primary payment processor in the UK – a partnership that has since evolved into a critical strategic alliance, fuelling substantial growth for Deliveroo.
In 2020 alone, Deliveroo’s transactions exceeded £4 billion, with Stripe handling over 90% of these payments. The company also introduced local payment options as it expanded into new markets, achieving a 97% transaction authorisation rate, and reclaimed over £100 million in revenue that could have been lost to fraud with Stripe authorisation tools.[3]
Enhanced security and regulatory compliance
In sectors like finance, healthcare, and technology, stringent regulations govern the protection of sensitive information from unauthorised access or misuse. These regulations mandate comprehensive measures, including data encryption, secure storage, meticulous access control, and detailed reporting of security breaches or suspicious activities. Integrating digital fraud prevention tools that offer multi-layered security features, such as encryption, authentication, and robust access controls, allows organisations in heavily regulated sectors to meet these stringent security requirements more efficiently and effectively.
A prime example of the efficacy of such tools is seen in the success of ComplyAdvantage, a leading UK-based Regtech firm. Specialising in advanced software solutions, ComplyAdvantage helps businesses mitigate risks associated with AML and fraud. Through an analysis of over fifty payment fraud scenarios, the company found that its solutions reduced financial losses for its clients by 25% and boosted the operational efficiency of analysts by 40%.
Improved customer retention and financials
Implementing strong fraud prevention measures demonstrates a business’s commitment to protecting its customers’ security, an essential aspect of building a trustworthy relationship. This commitment instils trust and fosters a deep sense of loyalty among customers. When customers feel secure and valued, they are more likely to continue using the services or products of a business, leading to increased customer retention. Over time, this loyalty translates into sustained revenue growth as satisfied customers make repeat purchases and are more likely to recommend a business to others, expanding the customer base and boosting revenue further.
The experience of global electronics giant Philips underscores this dynamic. As the company navigated its shift to online operations, it encountered significant challenges in its checkout and payment processes, including friction, cart abandonment, payment denials, and fraud. These led to substantial losses in valid orders and adversely affected customer satisfaction and financial performance.
Philips’ fortunes changed dramatically after partnering with Signifyd, a leading US-based ecommerce fraud protection provider. With Signifyd’s solution, Philips decreased chargeback rates from 5% to less than 1% and increased conversion rates from 40% to 75%, increasing customer satisfaction and contributing hundreds of millions of dollars to its revenue.[4]
AI-native technologies unlock new possibilities
Advanced fraud detection and prediction
AI-powered fraud detection utilises advanced algorithms to do more than analyse real-time transactions. These algorithms learn from historical trends and predict potential fraud risks before they even happen. This proactive approach offers a significant advantage over traditional methods, which often play catch-up with fraudsters’ ever-evolving tactics.
Ravelin is a front-runner in the UK’s AI-native fraud detection arena.[5] The company’s AI-native platform enables its system to run thousands of self-evolving models simultaneously to cater to each client’s specific needs. This capability sets Ravelin apart in an industry shifting away from rigid legacy systems, which face significant limitations that curtail their effectiveness and real-time responsiveness.
In addition, the company’s AI innovations have facilitated the expansion of its offering beyond its core payment fraud engine to fraudulent account takeovers, returns & refunds, marketplace pay-outs, and promotions and vouchers. This expansion has greatly increased Ravelin’s addressable market to $9 billion and established the company as an indispensable partner for industry giants such as Fiserv and Mastercard.
Multi-dimensional analysis
AI algorithms are powerful detectives in the fight against fraud. They can analyse diverse data sources, such as transaction history, device fingerprinting, geolocation data, and social media activity, to create a comprehensive risk assessment for every transaction.
Onfido, a leading digital identity verification provider from the UK, exemplifies these capabilities. The company expanded its platform to include diverse identity verification metrics and signals, providing businesses a holistic view of their customers and empowering them to make faster, informed decisions about which products or services to offer and when to offer them.[6]
By integrating multi-dimensional identity verification signals into its platform and offering the convenience of seamlessly embedding identity verification at any point in the customer journey through user-friendly drag-and-drop workflows, businesses can deliver a smooth user experience without sacrificing rigorous fraud protection measures. This approach has resulted in Onfido’s clients reporting a 54% improvement in fraud accuracy.
Automation of operations
AI automates many aspects of fraud detection and prevention, significantly reducing the need for manual intervention and enabling organisations to efficiently process a higher volume of transactions.
Veriff, an innovative Estonian company, has developed an AI-driven identity verification platform that provides fraud prevention and regulatory compliance. The platform automates the analysis of Know Your Customer (KYC) documents, biometric verification, and fraud analysis, enabling the rapid assessment of thousands of critical data points and documents in seconds. The company’s advanced solution has attracted substantial investment, culminating in nearly $200 million in funding. This includes $100 million from a Series C funding round in January 2022, led by leading investors Tiger Global Management and Alkeon Capital Management, putting the company’s pre-money valuation at $1.4 billion.[7]
Consolidation in the fraud prevention market
The M&A landscape in the fraud prevention sector is gaining momentum, driven by the strategic moves of fraud prevention solution providers and key players in the payment and e-commerce sectors. These entities are actively consolidating their market positions, broadening their operational scope, and acquiring technology capabilities. Between 2021 and 2023, 25 transactions were reported, a sharp rise compared to the 9 transactions seen in the previous three years.[8]*
The early months of 2024 have already produced three significant transactions in quick succession. In January, private equity firm Accel-KKR finalised a deal with American Express (NYSE: AXP) to acquire Accertify, a fraud prevention and chargeback management specialist.[9] With Accel-KKR’s backing, Accertify can harness the latest in digital technology, including AI and machine learning, to craft cutting-edge fraud prevention tools that address its customers’ evolving needs.
In another noteworthy development during February, Euronet (NASDAQ: EEFT), a prominent provider of fintech solutions and payment services globally, announced its acquisition of Infinitium, a Singapore-based digital payments firm renowned for its risk management and payment authentication offerings.[10] Integrating Infinitium’s solutions, such as 3D Secure (3DS), into Euronet’s Ren payments platform will bolster defences against consumer fraud and merchant chargebacks for online payments.
In the same month, Entrust, a privately held company providing certification and verification services, entered discussions to acquire Onfido, a pioneer in identity verification. The deal exceeds $400 million and is currently awaiting regulatory approval.[11]
Rising Demand will spur continued industry consolidation
The battle against fraud faces a double threat: smarter criminals and stricter regulations. Fraudsters are deploying ever-more sophisticated tactics, leading to billions in losses annually. Adding fuel to the fire are increasingly stringent regulations, especially for companies operating across borders. This creates a perfect storm – businesses need advanced technology to combat a growing array of fraud risks while navigating complex compliance requirements in multiple regions. The diverse and complicated nature of these challenges is increasing the demand for comprehensive fraud protection solutions incorporating advanced analytics, machine learning, and artificial intelligence capabilities.
Consolidation allows fraud prevention providers to acquire the advanced technologies and expertise to offer more comprehensive and globally scalable solutions to meet these requirements. It also enables providers to cater to growing customer preferences for integrated, end-to-end solutions that provide a wide range of capabilities, from detection to prevention and mitigation.
Rapid technological advancements will also likely further propel this consolidation in the sector as developing effective in-house AI-native solutions is becoming increasingly complex and resource-intensive, especially for large incumbent players that have yet to fully embrace the technology and AI shift.
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