In 2021 the digital economy took a giant leap into the future with the arrival of web3 and the emergence of NFTs as a secure store of value for digital assets and collectibles. So, what can we expect to see in 2022? Will the year ahead usher in as many changes as the year that has just passed?
Prediction #1 – Fraudsters will exploit the openness of web3 using stolen financials
The metaverse, also referred to as web3, is a decentralised version of the internet where platforms and apps are built and owned by users. Meta (previously Facebook), Microsoft, and a host of large gaming companies are the first movers in this space and are building the future of our digital economy. So, while we should definitely expect exponential growth of digital assets in 2022, this doesn’t just mean high value NFTs, but also low value, high frequency in game purchases for things like swords, skins, and usernames, also known as downloadable content (DLCs).
The main risk this presents is that these environments are preferred locations for fraudsters testing stolen financial instruments (to see if they are approved) before going on to make higher value purchases. This presents a massive chargeback risk for merchants, and especially gaming companies. Alternative payment methods like cryptocurrencies are not risk free either, as they provide little to no purchase protection to customers. We therefore forecast an increase in fraudsters exploiting the openness of a nascent web3 using stolen financials that are easily available on the dark web, but will soon be even more easily exchangeable in the metaverse.
In parallel we expect to see an increase in the number and value of scams coming from fraudsters masquerading as creators. A reference example from 2021 was Squid Coin, a fraudulent cryptocurrency named after the wildly popular Netflix series, Squid Games that netted scammers an estimated USD 3.5 million dollars. Curators of web3 environments will need to introduce additional KYC checks and better ‘creator monitoring’ to combat this threat. We are already seeing online marketplaces tackling this issue with merchant monitoring solutions, which led us to believe web3 platforms will need to take similar steps. The challenge is that web3 is going to look a lot like the wild west for the foreseeable future, especially as metaverse environments become more interoperable. Therefore consumers will need to be diligent.
Prediction #2 – The beginning of the end for credit bureaus in ecommerce
Many BNPL providers rely on credit bureaus like Equifax, Experian, Transunion, and SCHUFA to assess the creditworthiness of new customers. The problem is that many Millennial and Gen-Z cohorts have a limited credit history; hence, credit bureau checks are becoming less and less effective at determining their true credit worthiness in an ecommerce context. Simply put, loan default risk cannot be treated in the same way for a EUR 100 pair of trainers, as it can for a mortgage. We forecast that the rise in BNPL will accelerate a shift to alternative data sources that help providers make more accurate creditworthiness decisions by analysing: positive transaction history, deposit account history, and behaviour around the repayment of everyday bills like smartphone contracts, broadband, gas, and electricity. The recent acquisitions of big credit bureaus suggest that they see this shift coming, but we believe they have underestimated how quickly their positions might be eroded by alternative credit decisions that have been made possible by Open Banking and the network intelligence this provides.
Prediction #3 – Fraudsters and good customers will become harder to tell apart
More online shoppers are now using VPNs to mask their IP address and protect their personal data online – a behaviour that is often seen from fraudsters and that typically increases the risk score of a transaction. Spotting the difference between the two will become harder, especially as fraudsters are becoming more sophisticated at mimicking the behaviour of good users to avoid detection. On the one hand this could increase the percentage of false positives, on the other hand it will test how accurately vendor solutions can distinguish good transactions from bad ones, something that can be measured by tracking the Good User Approval Rate.
Prediction #4 – Compliance costs will continue to spiral, including fines levied against institutions that fall short
2021 saw record fines levied against companies that failed to comply with anti-money laundering regulations. We predict that both total compliance costs (headcount, processing, and vendor costs) and fines levied will increase in 2022. Why? Because the 6th Anti-Money Laundering Directorate (6AMLD) broadens the scope of money laundering offences to include those aiding and abetting, inciting and attempting an offence. This will make it easier for law enforcement to pursue those often described as enablers facilitating money laundering or serving as accomplices in money laundering schemes. The biggest winners will be those who can leverage technology like transaction monitoring and sanctions and Politically Exposed Persons (PEP) lists to avoid entering into illegal business relationships.
Prediction #5 – A fightback against fake identities
In 2021, we saw a massive rise in the use of fake and synthetic identities, constructed from stolen information widely available on the dark web. This has made it easier for fraudsters to pass KYC checks for new services like BNPL, gift cards, and online gaming platforms. We expect this trend to continue, however we forecast a fightback as machine learning algorithms get better at identifying signals that point to an increased probability of fraud, for example a frequent change in IP address, device ID mismatches, and frequent asset hopping.
About Christian Mangold
Christian is a seasoned growth executive who successfully scaled SOFORT before its acquisition by Klarna, where he served as Managing Director for the DACH region. As Co-CEO, he leads Fraugster’s entire day-to-day operations. In his spare time, he is an outdoorsman who likes to ski and sail with his wife and three children.
About Fraugster
Fraugster is a payments intelligence company that helps the ecommerce ecosystem to minimise fraud and maximise revenue by making smarter real-time business decisions. We help our customers (PSPs, BNPL providers, and online merchants) solve multiple use cases by giving them access to various, interoperable products via one integration. Fraugster has developed one of the most accurate AI fraud prevention solutions on the market and is backed by some of Europe’s most reputable deeptech investors.
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