Address payment fraud with a new approach to risk management

Ravi Loganathan, Head of Financial Institution Services at Sardine, describes how the financial sector can improve fraud detection and compliance across traditional and decentralised finance.

Sardine’s mission is to enable safer, faster payments through modern risk management. Our technology is integrated into a customer’s mobile and web experience to prevent common fraud vectors, including account takeover, identity fraud, friendly fraud, and imposter scams, across various payment rails.

Our fraud detection and compliance solution combines device intelligence, behavioural biometrics, KYC/AML, transaction monitoring, case management, and more into one platform. It collects thousands of risk signals to identify suspicious actors, locate anomalies, and prevent fraudulent behaviour before money moves.

We provide instantaneous risk scores for sessions and end users that can be used to decline or approve the processing of transactions in real-time. Our customers used Sardine to detect seven times more fraud with two times fewer false positives when compared to previous service providers.

Sardine is unique in that we are comprehensive, proprietary, and data-centric – a combination of attributes vastly different from what you see in the fraud detection and compliance market today.

Several vendors exist for one or a group of components of the fraud and compliance journey, i.e., device intelligence or behaviour biometrics for fraud detection and risk scoring, KYC or KYB, AML compliance and transaction monitoring, case management, and more. Rather than hiring multiple vendors, Sardine offers a one-stop solution that provides more control and convenience and removes data siloes for better risk management.

There are middleware solutions that provide the same range of services, but they are an aggregation of different point solutions which often makes them more expensive and less effective due to data gaps. Sardine combines our proprietary device intelligence and behavioural biometrics technology and transaction monitoring solution with integrated partners providing data enrichment, KYC, AML, and more.

The major consequence of being comprehensive and proprietary is the data we can collect and combine to better service our customers. Due to our visibility across fraud detection and compliance, we utilise machine learning models to detect anomalies, predict fraudulent behaviour, and improve rulesets and decision-making in real-time – services most legacy fraud and compliance providers cannot offer today.

Sardine has over 140 customers, primarily in the fintech and crypto space where fraud is rampant and transactions are largely irreversible. Customers use Sardine for various use cases, including ACH and card funding fraud, card issuing fraud, payment fraud, identity fraud, social engineering, and more.

We’ve recently signed our first bank and are quickly expanding into serving traditional financial institutions, which increasingly need real-time fraud detection since their customers want to use real-time payment rails. Our latest product – Insights – aims to provide financial institutions with a quick way to assess an individual or business’ fraud risk before initiating any transaction.

While a bank may know a customer moved money into a crypto account or wallet, they have no way of knowing what happens to that money after it's off their platform. As a result, financial institutions carry considerable liability if their customer deems that transaction unauthorised since there is no way to claw back those funds.

As a result, financial institutions see crypto transactions as substantially risky. They have no choice but to hold the transaction for several days or block them outright to protect their customers from potential fraud, which creates substantial friction when moving money between the two systems.

If all players could have greater visibility into an entity’s financial actions and history across both systems, financial services would have better fraud and risk controls that would limit bad actors from taking advantage of this information gap. Improved visibility would lead to higher conversion rates when making payments and lessen friction for the end user when moving money.

Due to Sardine’s role in providing fraud detection, compliance, and payment services to fintechs and crypto companies, we have built risk scores and reputation levels for millions of individuals and businesses conducting transactions in traditional and decentralised finance. Our Insights offering provides a real-time, comprehensive view of an entity’s risk based on its history with cryptocurrencies, digital assets, and conventional bank products and services.

Insights’ users can call an API about any entity and receive our proprietary risk and reputation scores within our network. Any company with appropriate authorisation can use these signals to upgrade its existing fraud detection models and risk assessment processes by enriching existing datasets. Sardine has built this product within frameworks of applicable privacy laws and regulations.

Participating organisations will provide feedback, including identification of fraudsters, accounts, and devices compromised in transactions. This will ensure a stolen or fraudulent account discovered by one bank or merchant is flagged for others, similar to what consortium models do today within traditional finance.

The advancement of socially-engineered authorised push payment (APP) fraud, where criminals convince a consumer to initiate a payment on their behalf, has been a critical driver of fraud growth. According to the US Federal Trade Commission, imposter scams made up 40% of total US fraud losses (USD 2.3 billion) in 2021 – nearly doubling 2020 totals. However, this is not just in the United States; APP fraud is a burgeoning global issue.

Currently, there is limited communication between parties and intermediaries that enable instant money movement since little data is collected and shared during a push payment. The sending party often cannot verify the recipient before the transaction, nor can they detect whether their customer is being socially engineered into sending the payment.

Data-sharing is critical in overcoming APP fraud. If a payment originator could access data providing visibility into the payment recipient’s risk profile, no matter the rail or app being used, this would allow all parties to protect shared customers better.

Sardine aims to leverage our Insights product to provide this utility service for the industry.

Authentication is shifting dramatically towards biometrics, rather than usernames and passwords, to verify a user. Consequently, we anticipate traditional fraud vectors, such as account takeover, will be less effective for fraudsters, and social engineering and APP fraud will become more prevalent.

Fraud prevention will need to focus on this fraud vector increasingly. Advancements in artificial intelligence and machine learning are key, particularly as payments become irreversible when conducted via RTP rails or on the blockchain.

Lastly, more collaboration within the industry will be key in overcoming counterparty risk when money moves between known and unknown parties. Existing consortium models have worked wonders within traditional finance. However, they do not cover the new frontiers of fintech and crypto.

Increasing visibility among all players within financial services will be key in the evolution of fraud prevention.

About Ravi Loganathan

Ravi Loganathan is the Head of Financial Institutional Services at Sardine. He previously led data and analytics at Early Warning Systems, where he helped launch Zelle, and spent several years at Bank of America, leading compliance and fraud operations teams across several divisions.