Get All Access for $5/mo

How AI and Machine Learning Are Improving Fraud Detection in Fintech Identity theft is common, but with the rise of AI and machine learning, its effect on the fintech industry has been reduced drastically. Here's how.

By Taiwo Sotikare Edited by Chelsea Brown

Opinions expressed by Entrepreneur contributors are their own.

Internet fraud is a menace in our various financial institutes, and many fintech companies have been victims of this fraud game. Detection of these attacks comes in two ways: through inconsistent traditional methods or using ever-growing artificial intelligence mechanisms.

Traditional methods, such as the rule-based method, are still widely used by most fintech companies in contrast to AI. At the same time, some are adjusting to leverage machine learning and artificial intelligence, improving ways to detect fraud. Hence, bringing us to the question below.

How have AI and machine learning improved fraud detection in the fintech industry? What specific applications does this technology touch, and what mechanisms complement it? We have compiled key areas where its application has become highly beneficial.

Related: Fraud Detection In Fintech: How To Detect And Prevent Frauds In the Lending Industry

Fishing out identity thieves before they penetrate a server

Identity theft is common, but with the rise of AI, its effect on the fintech industry has been reduced drastically. Users are bound to become more susceptible to fraud in this area when activities like creating accounts, submitting applications or filing tax returns become more computerized. Digitized data is easier to access, giving identity thieves more possibilities to penetrate the server. For instance, identity thieves can create accounts in someone else's name, get access to that person's benefits or even steal their tax returns using the stolen identification information. In curbing these anomalies, AI is to the rescue. AI-driven identity theft detection systems such as pattern recognition are pretty good at reducing the danger of such scams and spotting them early on. Depending on the circumstance, the models may be able to identify suspicious transactions, behaviors or information in the supplied documents that do not fit the customer's usual patterns of behavior, therefore averting a possible danger.

Quick detection of credit card fraud through identification of unusual transactions

Customers may secure their credit card and account information in various ways, such as by utilizing virtual private networks or virtual cards or checking the website certifications. However, with fraud tactics becoming more sophisticated, organizations handling credit card transactions and transfers must scan them to avoid any risks. AI methods such as data mining have been provided with a sizable dataset that includes both kinds of transactions (i.e., card transactions and transfers) to be trained to spot fraudulent behavior. By analyzing it, the model can spot fraud red flags. Are there possible ways the illegal transaction can be flagged and detected on time? Yes, for instance, a rapid spike in the customer account's weekly or monthly transaction values or a purchase made in a store that doesn't ship to the country where the account holder resides. All these can be swiftly detected with the help of AI, and fraud can be mitigated on time to avoid running losses.

Related: How Artificial Intelligence Is Changing Cyber Security Landscape and Preventing Cyber Attacks

Detection of money laundering amidst account activities

Fintech companies and banks use deep learning AI algorithms such as neural networks to uncover undiscovered connections between criminal conduct and account activity. Money laundering is difficult to identify with traditional approaches since the signs are frequently quite subtle. Still, since the emergence of artificial intelligence, every action is carefully considered because such practice typically involves large sums of money and is carried out by organized criminal organizations or entities that appear to be genuine.

Despite a thorough mechanism put in place, individuals are undoubtedly susceptible to errors. It gets challenging to spot money laundering-related acts among cover-up activities because they leave no room for suspicion, but AI has been at the forefront of detecting such. For instance, a wrong transfer of funds might be the key to revealing a set of illegal activities. In addition, there are situations when several transactions on an individual's account come together but don't appear legitimate when scrutinized. These patterns could be quickly identified by AI systems put in place, and fraudulent activity could be prevented on time.

Early detection of fraudulent loan and mortgage applications

In recent times, most fintech companies and banks heavily rely on fraud detection AI technologies to assess loan and mortgage applications by fraudsters. It is a crucial component of their risk assessment and aids the analysts in their day-to-day job. With machine language, they can extract pertinent data from the applications and analyze them using a model developed through a dataset that includes both legitimate applications and those flagged as fraudulent. The essence of AI in this area is to detect trends that can likely lead to fraud so that alarms can be swiftly raised, whether accurate or not. It allows the analyst in charge to scrutinize further, which could either lead to acquittal or fraud prevention. It also helps fintech companies to predict the chance of a customer committing fraud as it can help forecast trends by examining consumer behavior data.

Related: Digital Twins: AI & ML Transforming the Fintech Landscape

Banks and fintech companies still occasionally believe that rule-based methods are safer and more straightforward. Traditional rule-based methods and AI tend to support one another but will likely change sooner. This is due to the complexity of rule-based systems having their bounds and the fact that fraud efforts are getting more sophisticated and dynamic than in the past. The rule-based method is a losing struggle since it necessitates the creation of new rules each time new patterns appear. Instead of constantly being one step behind, fintech companies can actively foresee fraud using AI and machine learning techniques to safeguard their financial integrity.

Taiwo Sotikare

CEO of

Taiwo Sotikare helps businesses grow their monthly income x10 through effective content marketing. He creates high-quality SEO content that dominates Google's front page. Businesses can confidently rank for their primary keywords and generate more quality leads.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Business News

Mark Cuban Warns About Fake Fundraisers on Social Media After Assassination Attempt: 'Makes Things Worse'

Mark Cuban warned his followers about online grifters who try to capitalize on tragedy.

Business Culture

Want Engaged Employees? Act Like a Nanobubble

Nanobubbles revitalized Lake Elsinore by addressing its root problems, offering a metaphor for sustainable employee engagement.

Starting a Business

He Started an 'Accidental' Business at 25 With Just $2,000 — Then Gave His Product to the Pope: 'Anyone Can Be an Entrepreneur'

Michael Aram, founder of the namesake luxury home and jewelry brand, learned the art of metalworking in India — and used it to launch a global brand.