Fully verified customers account for 60-90% of fraud in financial services, making identity verification and KYB compliance essential in mitigating risk.
Friendly fraud, also known as first-party fraud, occurs when a known and verified user exploits financial platforms. Fraud rates have surged, and most fraud prevention tools are designed for merchants and e-commerce, leaving fintech companies and digital wallets particularly vulnerable.
Understanding the Types of Friendly Fraud
- Chargeback Fraud
Chargeback fraud is one of the most common fintech fraud tactics. A user initiates a chargeback despite having received goods or services, exploiting the high cost of investigation. Many fintech platforms and neobanks, especially those without robust compliance and KYB identity verification, refund the charge to avoid operational expenses. - Insufficient Funds (NSF) Exploits
ACH transactions in fintech apps and neobanks present another fraud risk. Fraudsters exploit pre-funding policies by withdrawing funds from a linked bank account before the fintech platform retrieves them, resulting in NSF fraud. This method enables bad actors to double their money while appearing as fully verified users. Distinguishing between genuine consumer errors and willful fraud is critical in risk management.
Strengthening Fraud Prevention with Data and KYB Identity Verification
Prevention starts with gathering comprehensive user data before fraud occurs. Fintech platforms must enhance identity verification, KYB compliance, and transaction monitoring to differentiate between legitimate transactions and fraudulent activity.
- Real-Time Device and Behavioral Analytics: Fraudsters leave digital traces in device usage and interaction patterns. Advanced fraud detection solutions leverage behavior biometrics and device intelligence to monitor users from onboarding to transactions, identifying anomalies indicative of fraud.
- Data Sharing for Repeat Offenders: Fraudsters often target multiple fintech platforms. Unlike traditional banks, many fintech companies lack access to shared fraud data. A strong KYB framework that integrates bank consortium data, telecom insights, and email reputation analysis provides a more complete fraud risk profile.
- Expert Fraud Operations Support: An integrated fraud operations and compliance team enhances fintech security. By leveraging expertise across the fintech and crypto ecosystem, companies can proactively mitigate fraud risk rather than reactively addressing losses.
The Cost of Ignoring Fraud Prevention
Chargebacks and NSF fraud are expensive, and maintaining an internal fraud prevention infrastructure can be cost-prohibitive. Compliance solutions that integrate fraud detection with KYB identity verification significantly reduce financial and reputational risks. A fintech company that replaced its internal fraud tech stack with an automated compliance and fraud prevention API reduced costs by 10x while maintaining performance.
As fraud tactics evolve, fintech companies must implement sophisticated fraud detection and KYB compliance strategies to prevent first-party fraud. By leveraging data-driven identity verification, device intelligence, and behavioral analytics, financial platforms can reduce fraud losses while ensuring compliance and customer trust.