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For decades, before alternative credit scoring was popularized, the credit score dictated the financial opportunities both borrowers and lenders could utilize. Traditional credit scoring systems heavily relying on credit reports have helped lenders assess financial risks when granting loan products. 

The world of finance is undergoing a significant transformation with the rise of open banking. By integrating technology with financial systems, customers can now share and access their information more easily—making for efficient financial management for both clients and financial institutions. 

However, developments in technology pose risks for security vulnerabilities. Fraudsters see tech connectivity as new avenues to exploit, which is why open banking fraud detection is of the utmost importance.
In this article, we talk about open banking, fraud detection, and the importance of robust fraud detection methods. Learning the value of secure systems can help your business ensure the success and sustainability of your open banking technology.

Understanding Open Banking

Using open banking refers to a financial services model that allows your business to use third-party open finance technology providers to access customer banking information through secure Application Programming Interfaces (APIs). Traditionally, this data was siloed within individual banks, making it difficult for external companies to offer innovative financial products or services.
The key aspects of open banking are:

Data Sharing:

Open banking allows customers to securely share their financial data with authorized third-party providers (TPPs) like FinTech companies or financial advisors. This data can include account balances, transaction history, and income information. 

For instance, if your business avails one of Brankas’ services as a TPP for your e-commerce website, your clients can easily and securely share their information through our system—making it easier for your business to view their data. This enables you to have more opportunities to offer your customers new products and services without doing a deep dive into verifying their information every time.

Customer Consent:

A core principle of open banking is customer control. Your clients can explicitly grant permission for your TPPs to access their data, ensuring transparency and empowering them to manage their financial information.

Application Programming Interfaces (APIs):

APIs act as intermediaries, facilitating the secure exchange of customer data between banks and TPPs. These APIs follow standardized protocols to ensure data security and privacy

Overall, open banking offers a win-win situation for both your consumers and your financial institution. Consumers benefit from greater choice, convenience, and potentially lower costs, while your business can leverage open banking to attract new customers and offer more competitive services.

What is Fraud Detection?

Integrating finance technology into your business also comes with risks of fraudulent activities. So, by understanding what open banking fraud detection is and how it works, you gain insights into how scammers think and how you can prevent them.

Open banking fraud is different from traditional online banking fraud with it focusing on unauthorized access to customer data through open banking connections.  While traditional online banking fraud might target login credentials to steal funds directly, open banking fraudsters aim to exploit these connections to access a broader range of financial information. 
A few common types of open banking fraud include:

Account Takeover (ATO)

Account Takeover (ATO)

Fraudsters steal login credentials and gain unauthorized access to a customer's bank account through open banking connections. They can then initiate fraudulent transfers or payments through these connections, bypassing traditional security measures.

Data Scraping

Data Scraping

Malicious actors can attempt to scrape customer financial data exposed through open banking APIs. This stolen data can be used for identity theft, sold on the dark web, or used to target other financial institutions.

Third-Party Provider Fraud

Third-Party Provider Fraud

A compromised or fraudulent third-party provider can potentially misuse access to customer data through open banking connections. This could involve unauthorized data collection, manipulation of transactions, or even facilitating money laundering activities.

Payment Injection Fraud

Payment Injection Fraud

Fraudsters can manipulate open banking APIs to inject unauthorized payments or alter existing payment instructions. This could involve creating fake invoices or manipulating payment amounts to steal funds.

These are just a few examples of possible fraudulent activities. And as open banking evolves, the tactics of fraudsters can probably change as well. The potential consequences of successful open banking fraud are severe—impacting your customers, company, and even the entire open banking ecosystem.

The Importance of Fraud Detection in Open Banking

With the risks of open banking fraud laid out, it’s apparent why fraud detection is important. Ultimately, effective fraud detection is key to the success of your open banking systems. Without proper detection, the ramifications can significantly affect you and your business consumers.

The Importance of Fraud Detection in Open Banking
Your customers can incur financial losses due to unauthorized transactions, identity theft, and a loss of trust in open banking services.
The Importance of Fraud Detection in Open Banking
Fraudulent activities can cause reputational damage, potential regulatory fines, and increased risk aversion toward open banking adoption.
The Importance of Fraud Detection in Open Banking
Successful open banking fraud can stifle technology innovation due to security concerns, reduced consumer trust, and a reluctance to share financial data.

Implementing robust fraud detection measures offers compelling advantages to your business. To break down how they can positively affect open banking, here are some of its benefits:

Customer Protection
Customer Protection:
Using fraud detection systems safeguards financial data, prevents unauthorized access, and fosters a sense of security when using open banking services.
Maintaining Trust
Maintaining Trust:
When your customer’s data is protected, it can build confidence in open banking, encouraging wider adoption and supporting innovation within the financial ecosystem.
Risk Mitigation
Risk Mitigation:
With effective fraud detection practices, your business can minimize financial losses for both your customers and business, ensuring the stability of your open banking system.

Fraud detection empowers open banking to reach its full potential by enabling secure data sharing and driving innovation in financial services. Using trusted products and services like Brankas’ advanced fraud detection can help protect your business from potential fraudulent activities that scammers may attempt to do.

How to Combat Open Banking Fraud

Open banking security relies on a layered approach that combines preventative measures with proactive detection and monitoring:

How to Combat Open Banking Fraud

Preventative Measures

Strong Authentication:

Multi-factor authentication (MFA) and biometrics (fingerprint, facial recognition) add an extra layer of security beyond passwords, making it more difficult for unauthorized users to gain access. Using popular products for MFA like Google or Microsoft’s Authenticator apps can provide additional security to your financing accounts.

Data Encryption:

Sensitive customer data should be encrypted at rest and in transit, minimizing the risk of exposure even if a breach occurs. It’s important to employ TPP services that can ensure robust data encryption systems in their services.

Secure API Design and Access Controls:

Implementing robust security protocols for open banking connections, including authorization controls and data encryption, is critical to prevent unauthorized access

So, using products like Brankas’ Merchant Link fraud detection can ensure the safety of your client’s data. With fraud detection features integrated into the system, Brankas’ product guarantees your financial system is fraud-free.

Detection and Monitoring

Machine Learning (ML) and Artificial Intelligence (AI):

Using ML and AI algorithms can identify anomalies in your customers’ behavior and flag suspicious transactions initiated through open banking connections. These tools can analyze historical data on fraudulent activities, continuously learning and adapting to new fraud patterns

Real-time Transaction Monitoring:

Continuously monitoring account activity for unusual behavior allows you to immediately identify potential fraud attempts. Transactions made using open banking systems generally have the benefit of real-time visibility of suspicious activity.

For instance, Brankas’ Visa Card Data fraud detection system oversees detailed cardholder information including their account movements. This provides insights into frequencies of unusual transactions that can turn out to be fraudulent.

Behavioral Biometrics:

Analyzing your client’s typical interaction patterns like typing speed or login location can help detect unauthorized access attempts. Deviations from normal biometric habits can trigger alerts for further investigation.

Risk-Based Authentication:

Implementing dynamic authentication based on the perceived risk of transactions can be initiated through open banking APIs. High-risk transactions may require you to provide stronger verification methods for your customers like a one-time passcode or a phone call to the customer.

Overall, a combination of these methods provides a comprehensive approach to fraud detection in open banking. Adding any of these security measures to your financial system can secure your and your customers’ information—making transactions within your platform smoother and more reliable.

Investing in Brankas: Your Partner in Open Banking Fraud Detection

Open banking holds immense potential to revolutionize your financial system by utilizing tech innovation and empowering your consumers with greater control over their financial data. However, it’s important to implement robust fraud detection methods to ensure the success and sustainability of your business financing process. 

With that said, consider partnering with a trusted third-party provider like Brankas for a fraud-free financial system. As experts in FinTech, we specialize in creating modern financial processes that promote secure and seamless workflows for your business. Our solutions ensure that both you and your clients enjoy smoother and safer transactions with our innovative solutions.