On December 15, Kevin Gosschalk, founder and CEO at Arkose Labs, and I met virtually to talk about fraud trends we believe will impact 2021 and the years to come, including the overlapping effects of the COVID-19 pandemic.
As Kevin explained it, Arkose Labs bankrupts the business model of fraud with an innovative approach to determining user intent and remediates attacks in real time for use cases including compromised accounts due to credential stuffing, enrollment fraud, and gift card fraud. Risk assessments combined with interactive authentication challenges undermine the ROI behind attacks.
As founder and CEO of Socure, I’m proud to say our team has built a predictive analytics platform that verifies a consumer is who they say they are with respect to any new identity across B2C digital applications in the U.S. Be it a bank, fintech, online gaming operator, or online prescription refill business, we verify for both fraud risk and regulatory purposes.
Here, you can read about our first four predictions and a recap of that conversation below, or you can view the webinar in its entirety here. Part 2 of this recap, including the final three predictions, will be published next week.
Fraud Trend 1: The Long Tail of COVID: The Digital World Has Changed Forever
No conversation about the future can be devoid of talk about the impact of COVID and the long tail effect on everyday lives and businesses in the future. Some experts say that five years of digital transformation took place in six months due to the number of services and products that have moved to online access.
Kevin delved into how for many retailers this meant a move to cashless, digital platforms to support curbside pickup and other similar services which significantly broadened the attack surface for unsophisticated merchants who didn’t understand the space. Other categories, such as video games and streaming services, were equally impacted because the user bases grew so fast that keeping up with the demands of dramatic growth left them far more vulnerable to fraud attacks than would be the case otherwise.
With digital banking, consumers outside the traditional financial system rushed to open bank accounts at neobanks to be able to receive stimulus and unemployment funds. We saw a different impact in the investment space where employed millennials were opening trading accounts to invest savings and a different lens, still, with credit cards where credit availability tightened as unemployment rates soared. With such a flurry of activity, it broadened the attack surfaces all around.
The world is in for a long recovery, and this new reliance on digital services will become a way of life. Long term, we think the impact may be that digital banks, with full suites of financial services, will grow faster than top tier traditional banks.
Fraud Trend 2: New Stars of the Digital Landscape Will Flourish in 2021
In a new post-COVID, digital-first world, a number of industries are moving and growing online that were almost exclusively physical interactions previously, including online gaming, cannabis distribution, prescription refills, and alcohol delivery. These products and services have particular age and identity verification requirements that are going to have to be fully digitized in order for them to operate, so this poses an exciting new revenue opportunity but also a nefarious situation due to bad actors. Further, Kevin explained how online gaming is well known for offering generous incentives to attract users which becomes a massive fraud vector for scammers trying to use stolen credit cards to collect rewards.
If the business environment isn’t challenging enough, these are all highly regulated industries. In the future, operators will be asking how to broaden their customer base and verify users at a quick pace under the construct of an ever-evolving regulatory framework. For example, 60% of U.S. states still have not authorized online gambling.
Moving forward, as customers return to casinos and other betting venues in person, operators will be looking to support gamblers digitally. Imagine that they will load payment into a mobile application that they can just tap at the blackjack table or slot machine. This need to blend our digital and physical worlds will accelerate at a rapid pace and create new attack vectors where fraudsters will try to use stolen identities and payment credentials to “game” the system. The question will become how to balance responsible growth of these platforms at record speed with the proper controls to mitigate fraud.
Fraud Trend 3: Businesses Will Rewrite Customer Engagement for a Post-COVID World
We spoke about emerging industries moving online, but what about businesses that have traditionally been facilitated in person but now require a digital channel? Think in terms of establishing bank accounts for the unbanked and underbanked that would include non-resident aliens, international students, and teenagers who would traditionally just present their birth certificate or identification credentials at a bank location. You can’t do that anymore. Then, there are common needs like renewing a driver’s license or onboarding new employees, sometimes at the pace of thousands of new associates a month.
Companies and government agencies will be building new platforms to support these interactions, which present yet another broadening attack vector for fraudsters.
Fraud Trend 4: Opportunity Knocks: Pandemic Scams Will Continue into the New Year
It’s a well-known fact that scams related to the COVID pandemic proliferated throughout this year. Consumer offers to expedite receipt of stimulus checks and, now, fake vaccines are being promoted before the vaccine has even been fully distributed.
Many people are unemployed and need to feed their families, making them vulnerable to these scams. The more desperate they are, the more likely they are to believe or hope such offers are legitimate. While some people work to solve this crisis, others are trying to profit from it. We expect this fraud trend to continue.
Fraud Trend 5: Vox Populi: Social Movements Will Create New Businesses Vulnerable to Fraud
State agencies were hit this year with a vertical curve of massive unemployment growth like this country has never seen before. Fraudsters attacked them because they were doing very little in terms of identity verification and fraud classification on people seeking unemployment claims. They became caught in this trap between sending millions of dollars externally to the wrong people and getting money to legitimate claimants. So, they stopped sending money altogether.
It results in an infrastructure and scale problem that requires the appropriate tooling to solve those challenges by deploying appropriate APIs and fraud solutions very quickly. We’ll continue to see these kinds of issues in the future, so, moving forward, any entity or business involved with the distribution of a financial product should take note.
Fraud Trend 6: The Evolving Regulatory Landscape Will Drive Innovation
I can’t believe I’m admitting it, but there’s a bill in front of Congress right now, called the Improving Digital Identity Act of 2020, that’s going to bring some good regulatory change which will spur innovation to solve some of the scale-based issues we saw in 2020, like the issue with state unemployment agencies that we just discussed.
Kevin pointed out that GDPR (General Data Protection Regulation) in Europe has been successful in forcing companies to think about privacy and security issues. They must look beyond “is your infrastructure holding our data?” to also consider other factors, such as what is being done with that data, what is being collected, who owns it, and so forth.
We can’t leave this subject without mentioning the interesting balance needed between security challenges and customer experience. While many consumers want a one-click, totally passive user experience across the Internet, there is the product challenge of ensuring there are appropriate tooling and controls. In this regard, what wasn’t sexy five or 7 years ago is actually very attractive now: utilizing machine learning and the newest forms of predictive analytics can solve these problems and enable new innovation and enterprises. Within a regulatory framework to make these more accurate decisions, I see it pushing new standards and utilizing biometrics, machine learning, and mass amounts of data at scale.
When Socure works with regulators, which we do across banking, gaming, and HIPAA (Health Insurance Portability and Accountability Act) verticals, they are excited about these type of technologies and tools because we’re not only saving someone’s fraud bottom line, but we’re actually doing a real service for consumers and giving them a better user experience and, furthermore, saving their identities from being stolen and manipulated at scale.
With everyone operating largely on the Internet now—from kids and teenagers on up—and with more activity moving to the Web and mobile-only, verifying people and identifying risk is only going to get more challenging by the day.
Fraud Trend 7: Heightened Fraud Attacks Will Be the New Normal
With wider attack surfaces, more online activity, ongoing stimulus funds, and the number of places that lack sophisticated controls, these are just easy ways to steal money in many forms. No doubt, we can expect heightened fraud attacks to be the new normal.
The ability to hide in a remote world where people move fraudulent gift cards, stolen cell phones, or money between bank accounts, it makes the job of identifying bad actors that much more difficult because they are operating under the radar. It’s important to iterate that even though there is a large incentive structure and a huge population of criminals, your business can take precautions to prevent these schemes and scams.x
Kevin and I are both fortunate to talk to a large number of companies to learn about the latest attack patterns. An important question to ask yourself: what is it about my product or service where a criminal can make money? Then add the appropriate friction and controls to mitigate that risk.
If you have further questions or want to learn more about Arkose Labs, please visit this page.