Also called neobanks or virtual banks, challenger banks focus on innovation, and they provide services that appeal to niche market segments such as small businesses, freelancers, and the traditionally unbanked. Although these newcomers are poised to disrupt the financial landscape and challenge the market share held by traditional banks, they also face unique fraud challenges, and failure to rise to these challenges may threaten their long-term viability.
1. Overcoming financial restraints
Challenger banks often lack the funds to implement sophisticated, custom fraud detection and prevention methods, but if they ignore fraud completely, they will lose money and hurt their reputations, ultimately threatening their very existence.
Bad actors are aware of the anti-fraud technology gap between challenger banks and traditional banks, and they focus on exploiting challenger banks because of this fact.
To deal with this limitation, challenger banks must find affordable ways to implement scalable solutions that allow them to leverage powerful anti-fraud tools without forcing them to expand their IT teams or invest in expensive infrastructure. Challenger banks with lean teams and limited budgets can also save time and money by automating as much of their anti-fraud efforts as possible.
2. Protecting the customer experience
A generation or two ago, people went into a local bank or a branch of a national bank in their area, and they started a relationship. They opened an account, and for the most part, they stayed with this bank for the rest of their lives.
Consumers, in general, prefer to have consistent relationships with their service providers, and they tend to be even more loyal to their banks.
Unfortunately, this trend does not extend to challenger banks. Consumers typically sign up for challenger banks because they see a specific advantage or service, and the signup process is generally much faster and has less friction than opening an account at a traditional bank. But consumers don’t commit for life.
Consumers who use challenger banks don’t judge them with the same criteria their parents or grandparents employed as they forged relationships with traditional banks. Instead, they expect these banks to perform just as intuitively and seamlessly as all the other apps on their phones, and if they encounter issues, they will jump ship and look for another bank without hesitation.
Challenger banks need to protect the customer experience, and arguably, they have to place even greater emphasis on the customer experience than traditional banks. However, like traditional banks, they still need to balance a frictionless customer experience with fraud-fighting efforts.
3. Monitoring the entire session
To strike the right balance between anti-fraud efforts and a positive customer experience, challenger banks should invest in fraud detection tools that monitor the entire transaction from app launch to the end of the transaction.
Rather than focusing exclusively on tools that only assess the financial elements of the transaction, they need anti-fraud solutions that work in the background and look at the IP address, device identity, location, time, and session behavior compared to the customer’s usual behavior profile.
4. Identifying fraud in the opening deposit
When new accountholders fund their challenger bank accounts with mobile transfers, the challenger bank can relatively easily ensure that the funds are legitimate, but the process becomes more challenging when customers want to use a check to fund their accounts.
To minimize this threat, challenger banks need check fraud detection tools that can scan every element of the check including both static and dynamic details.
5. Networking with other banks
Traditional banks work together to fight against fraud. Through networks like Early Warning and The Clearing House Association, they share information on fraud that affects their banks, making it harder for criminals to perpetrate the same fraud on another member bank.
Challenger banks don’t have these networks. Criminals can easily take their scams from one challenger bank to another, and they will continue to do so until these entities start sharing data about fraud on a network level.
To truly challenge the market share of legacy banks, challenger banks will need to continue to be leaders in innovative products and solutions for niche consumers, but at the same time, they will need to find ways to meet the evolving needs of their customers while reducing the risk of fraud.
If challenger banks cannot minimize the risk of fraud, their growth will never be certain, but if they can find the right balance between a satisfying customer experience and a safe branking environment, they are likely to become a significant competitor in this industry.
At SQN Banking Systems, we provide anti-fraud solutions to financial institutions of all stripes and sizes, and we would love to help your bank become more a powerful competitor. To learn more about how our solutions can help your challenger or traditional bank, contact us today.