90% of startups fail.
This sad statistic is the unfortunate reality for many new tech businesses, and nowhere is it truer than in Fintech.
In fact, the stakes are higher, risks far greater, and threats more dangerous in this fast-paced $44 billion niche.
Now, we’re not here to discourage you.
On the contrary, we want you to know what you’re up against because being blind to the risks (or not taking them seriously) is the biggest risk of all.
So to arm you with the knowledge you need to develop a safe and successful Fintech app, here are some of the issues you should look out for.
One of the most common and most significant risks of Fintech apps is being the target of hacks and cyberattacks.
Of course, this shouldn’t come as a surprise. Fintech is a particularly attractive target for hackers because it deals with people’s money and sensitive financial data like bank accounts and social security numbers.
Indeed, today’s “bank heists” are now happening entirely online. A VMWare report found that cyberattacks against the financial industry increased by 238% from February to April 2020—a mere few months.
While Fintech apps encounter every kind of cyberattack imaginable, two stand out as the most popular with hackers—ransomware and social engineering.
Ransomware is a type of malware that encrypts sensitive files or locks businesses out of their systems. The only way to unlock it is with a mathematical key that only the attacker knows, which you’ll get after paying a ransom (hence the name).
Ransomware is one of the most common cyberattacks on Fintech and the financial sector. In 2017 alone, 90% of financial institutions were hit by a ransomware attack. In 2020, the world’s third-largest Fintech firm, Finastra, was targeted as well.
So, why is ransomware so effective? Because most of the time, it’s far cheaper to pay off the ransom than to suffer downtime.
The silver lining (if you can call it such) is that a ransomware attack doesn’t typically steal or otherwise compromise user data. However, it still causes costly service disruption or data repair.
Nowadays, hackers tend to forego complex attacks in favor of something far less sophisticated but just as effective—exploiting human weaknesses. These schemes are called social engineering.
Phishing is the most popular social engineering attack, accounting for more than 30% of all data breaches. It involves manipulating users into divulging passwords or granting admin access rights to attackers, using various methods from emails to fake phone calls.
And social engineering attacks can even be an inside job, which is what happened when Postbank employees stole the bank’s master key and made around $3.2 million in fraudulent transactions.
How to Handle Cybersecurity Risks
With the frequency of attacks on Fintechs, one thing’s for sure: getting targeted isn’t a matter of if, but when.
Luckily, you have plenty of options to either prevent an attack or minimize its damage on your app. If you’re interested in Fintech app security, you can learn more about it here.
For now, here are some best practices.
Start by implementing robust account protection.
You can stop phishing and takeover attacks by implementing account protection layers like biometrics and two-factor authentication (2FA). That way, hackers can’t get into a user’s account even if they know the password.
Next, test your app thoroughly.
An app vulnerability is one of the easiest ways hackers can access your system, so make sure your coding is foolproof.
Apart from the usual testing regimen, we highly recommend doing penetration testing (a.k.a. ethical hacking), so you’ll know how resilient your app is against cyberattacks.
Moreover, educating all of your employees is the best way to prevent phishing attacks from targeting your front door.
Teach everyone the signs to look out for and educate them on cybersecurity best practices, like not opening email attachments from an untrusted source.
Fortifying your network perimeter is also vital since your app’s backend is a juicy target as well.
Use every security tool you have at your disposal to protect your server and cloud network—next-gen firewalls, antivirus software, DDoS migration, and access control protocols, just to name a few.
Finally, hackers won’t steal what they can’t use. Therefore, the best way to deter them from even trying is to devalue the data; in other words, make your data worthless if they get a hold of it. You can do this through encryption or tokenization.
Fraud and Money Laundering
Fraud and money laundering have always been significant risks whenever finances are concerned. But with Fintech, these risks are magnified.
Fintech is a double-edged sword. While it improves access to financial services for consumers, it also makes it easy for unscrupulous characters to commit financial crimes.
For example, let’s take money laundering as one of the most common financial crimes that government agencies are always on the lookout for.
Consider how a typical money laundering scheme works:
The critical part here is the first step—placement.
Criminals take a large amount of “dirty” money (profits from criminal activities) and spread it over multiple bank accounts and financial institutions. The smaller deposits make it seem like they’re regular legitimate transactions to the authorities.
Opening multiple bank accounts used to be a challenge for money launderers because banks usually had strict requirements. But not so with Fintech. Digital banks are making that process easier than ever, which means criminals can open up as many accounts as they wish.
Then there are cryptocurrencies like Bitcoin, which have become the go-to option for criminals and hackers.
Thanks to its anonymity and ease of cross-border transactions, transferring money to a country with weaker financial laws and anti-money laundering (AML) is now effortless.
Unfortunately, while the occurrence of money laundering isn’t necessarily your fault, it can still hurt your Fintech app. It lessens consumers’ trust and can lead authorities to sanction you with fines or even shut you down for noncompliance.
Perhaps the best example of a Fintech failure due to fraud is Wirecard. In 2020, the payment processing firm imploded after its CEO and other executives took over $4 billion in a decades-long money laundering scheme.
Another is the Bitcoin website Coin Ninja. In early 2020, CEO Larry Harmon was arrested after laundering over 354,468 BTC (roughly worth $311 million at the time).
Improving Your AML Game
As a Fintech app, it’s your responsibility to protect your customers from financial crimes and prevent them from happening in the first place.
Know Your Customer (KYC) initiatives are fundamental to combating money laundering schemes. The goal is to verify that customers are who they say they are and not an alias for someone with criminal records.
KYC is a mandatory verification process when opening an account and at regular intervals after that. It often involves the account owner submitting government IDs, photos, and other legal documents used to establish their identity.
However, fraudsters are becoming more sophisticated in fooling KYC, using fake IDs and even wax figures to take convincing fake photos.
One way to get around this is with Liveness Detection Technologies.
For instance, you can ask people to perform random actions or show the current date in a real-time video to prove authenticity.
But KYC is only the beginning. Constantly monitoring user behavior using AI is crucial. For example, AI solutions can help you detect unusually large spending, multiple password resets, address change requests, and other suspicious activity linked with fraud or hacks.
Inadequate Encryption and Data Integrity
By now, you’ve probably noticed a trend concerning the risks we’ve been discussing so far. They all rely on stealing your users’ data to get their money.
That’s why encryption should be the top priority of any Fintech app. Otherwise, you will be much more vulnerable to these risks.
People will use any Fintech app based on the trust that their data is safe in your hands, which is why data breaches are so damaging to your reputation.
Moreover, fixing them can be astronomically expensive. According to an IBM report, the average cost of a data breach is estimated to be at $4.24 million in 2021—the highest in 17 years.
Beyond establishing trust, encryption is also one of the easiest ways to comply with most government regulations. In fact, many agencies even require it.
For instance, the Payment Card Industry Data Security Standards (PCI DSS) require that companies encrypt credit card information before storing it in their database.
And while neither the Gramm-Leach-Bliley Act (GLBA) in the US nor the General Data Protection Regulation (GDPR) in the EU require encryption, they highly recommend it for compliance.
Tips on Implementing Data Encryption
Effective data encryption rests on three fundamental tenets:
- Encrypt data at storage
- Encrypt data in transit
- Manage encryption keys
Let’s look into each of them in more detail.
Encrypting data while stored in your database or server is crucial.
For this purpose, the Advanced Encryption Standard (AES) is the protocol recommended by the US government and regulations like GLBA and PCI DSS.
It uses 256-bit keys and 128-bit block sizes, making it considerably more secure than the older DES standard.
However, encrypting data while in storage isn’t enough. Unless you have no plans to move your data around, encrypting it while in transit is equally crucial. That’s because hackers can eavesdrop on app-server connections and possibly intercept any data sent.
Pretty Good Encryption (PGP) is the recommended technique for on-the-move encryption of data files and emails.
Managing your encryption keys is the final, but by no means the least important part of your encryption initiative. If hackers get access to your keys, they also get access to your data. Hence, you should use multiple keys and distribute them to various roles, so no one person has sole control.
How to Ensure Data Integrity
The issue of integrity and completeness is another vital data-related issue. In other words, how do you know that the data you have is reliable?
Anything can happen to data while in storage or transit, from corruption to deletion. Unfortunately, this can lead to the kinds of inaccuracies and errors that can be fatal in the finance sector.
Can you imagine the catastrophe of missing even a single 0 in a customer’s bank account balance?
Ensuring data integrity and completeness is all about having the proper checks in place. Specifically, your system must alert you if data is incomplete or arrives in an unexpected format. This enables you to detect and address the problem early.
Having a single, consistent format is also helpful to compare and manage your data much easier.
Lastly, a good reconciliation process is necessary to spot discrepancies by comparing them with an independent source.
Poor Regulatory Compliance
If there’s one thing that will bring even the biggest Fintech firms down in an instant, it’s failing to comply with the relevant regulations.
Just look at Revolut. Britain’s most promising digital bank got flagged by the UK regulators for allegedly shutting down its AML system, potentially letting fraudulent transactions go through.
The problem with regulatory compliance is that it can be a big headache for most Fintech firms. That’s because the process is often challenging, confusing, and downright expensive.
Take the US, for example. There is currently no Fintech-specific law that applies to Fintech apps. Instead, regulations will depend on the nature and features of the app.
If you’re serving consumers directly, you’ll need a green light from the Federal Trade Commission (FTC).
Working with credit cards? You probably need approval from the Federal Reserve Board. And don’t forget US AML laws such as the Bank Secrecy Act and the Patriot Act.
Compliance gets even more complicated if you decide to launch in several countries since you’ll need to deal with the regulations of each.
Some regions even require compliance from companies without a physical office in that location. GDPR is a prime example of this. As long as you handle data from EU users, the regulation applies to you.
The worst case is when the country in question has antiquated Fintech laws or none at all. Compliance in these countries will be an uphill, expensive battle at best.
The Real Reason to Prioritize Compliance (And How To Do It)
Because compliance is such a challenge, there’s the temptation to delay or skirt it all together. But as stories like Revolut, Beam Financial, and Blue Global have shown, that would be a recipe for disaster.
However, the real reason for compliance has less to do with satisfying the authorities, although it may not seem that way at first, than it does with protecting your users from hacks and frauds.
That is its core purpose. In the long run, it can help build your app’s trust and credibility.
If you approach it in this way, compliance becomes worthwhile despite any roadblocks.
So, how do you go about it?
The best and easiest way is to hire a lawyer or consultant with previous regulatory experience in your country.
While it can be an expensive option (good lawyers don’t come cheap, after all), the money and time you save from avoiding compliance mistakes more than make up the cost.
A slightly cheaper alternative is to use Regulatory Technology (RegTech) solutions.
Not only do these platforms help with compliance, but they’re also instrumental in monitoring transactions in real-time to help detect fraud and money laundering.
But however you do it, the most important thing is to prioritize compliance as early as possible.
Insufficient User Transparency
It’s not enough for today’s Fintech firms to simply provide access to financial services for more people. There should also be a drive to educate people on these services—what Fintech does, how to use it, and (most importantly) the risks involved.
This type of transparency is in sharp contrast to how banks used to work, relying on jargon, the fine print, and hidden fees to confuse users and make them spend more than they need to.
However, precisely because Fintech apps are so much easier to use than traditional channels, there’s a higher risk of people misusing them with disastrous results.
And the Robinhood app is the perfect illustration of this.
Robinhood is one of the most revolutionary apps to hit the trading space.
Launched in 2013, the app has a simple premise.
It aims to make trading accessible to everyone and not just the super-rich. It does this by charging zero commissions and making trading so simple it just takes a few clicks.
As promised, the app opened trading to everyone, even those with no previous experience. But, unfortunately, it’s incredibly easy to lose money in the stock market if you don’t know what you’re doing.
As a result, many amateur Robinhood users lost hundreds of thousands of dollars using the platform.
Without responsible usage, Fintech apps can cause people to lose money, rack up debt, or take a hit on their credit score.
Even if it’s the user that made a mistake, they will still blame your app. At best, it will reduce their trust in you.
That’s why educating and protecting your users from improper usage of your app is your prime responsibility.
How To Make Your App More Transparent
Ensuring transparency in your Fintech app is actually not that difficult. The key is to always act in the best interest of your users.
However, to do this, you must be prepared to take a short-term hit. That’s because you’d rather reject a customer transaction and lose revenue rather than let them unknowingly make a mistake.
With that said, here are some tips for app transparency.
Highlight important information. People should always have everything they need to make responsible decisions while in your app. This starts with laying out vital information clearly in your user interface.
For instance, an alert can let the user know before entering into an overdraft arrangement, including associated fees.
Enforce limits. That is an excellent way to help minimize potential risks and losses for your users. For instance, you can limit how much margin a user can take on in a stock trading app.
Of course, make sure to find a balance between protecting users and over-restricting them. And, as we mentioned in the first point, always give them all the necessary information.
Focus on education. Education is a big part of transparency, whether teaching people how to use your app or the underlying financial concepts.
Trading apps, for instance, should have resources to train beginners how to trade responsibly and limit their risk.
When explaining Fintech-related concepts, it’s essential to use plain language and avoid technical jargon as much as possible. If your non-tech-savvy grandma can understand it, then you’re on the right track.
Disclose everything. This is the basis of transparency. Be sure to list down all the costs and fees associated with a transaction or process.
If there’s a timeline (such as the time it takes to withdraw from an online bank), lay that out clearly, too. And never make outlandish claims, such as a trading app guaranteeing a specific ROI to users.
Tailor-fit the app to the user. Personalizing the app experience enables your user to utilize only those features of your service that are relevant and safe for them.
You’ll often see this with trading apps, where users have to do a screening test to determine their risk appetite and financial goals. In turn, the app only opens up features that are in line with that profile.
Intellectual Property Theft
We have described many different cyberattacks in this article, but intellectual property (IP) theft is by far the most dangerous. It’s where an attacker steals your app’s source code itself.
In a way, IP is the ultimate hack because it’s damaging on so many levels.
At the minimum, it will allow a competitor to steal your unique idea, proprietary technology, or confidential information. Naturally, this hurts your competitive edge, not to mention taking advantage of the effort and money you spent developing the app.
But what is even more worrying is the fact that stolen source code can become a lasting vulnerability.
For instance, some parts of your source code might contain API access functions or security keys, allowing an attacker backdoor entry to your system.
Even high-profile companies aren’t immune to this. Just last 2020, a Swiss developer leaked the source code of dozens of high-profile companies like Nintendo, Microsoft, and Disney all over the Internet.
In light of all this, it’s surprising that many companies are still not invested in source code protection despite the dangers.
How to Protect Your Intellectual Property
Intellectual property protection is a multi-layered endeavor with many different methods and techniques. But all of it can be summed into two categories – internal and legal protection.
Let’s take a look at internal protection first.
Like any valuable asset, you need to put multiple security layers around your source code to keep thieves out.
It starts with cybersecurity fundamentals, like setting up antivirus software, next-gen firewalls, and intrusion detection systems. Pay extra attention to data exit points in your infrastructure, such as outgoing emails, workstations, and USB devices.
The developers also have considerable responsibility for IP protection. Harmful practices, like embedding passwords in the source code or using a public repository to store sensitive files, are an open invitation to IP thieves.
That’s why it’s crucial to entrust the development of the app to trustworthy professionals.
Unfortunately, harmful practices are far too common; one data security researcher was even able to find sensitive data within 10 minutes of searching in the code repository GitHub.
On top of protection, you also need a quick way to detect if a breach is about to happen. You can rely on data logs or real-time alerts to help you with this.
Finally, consider protecting the code itself using encryption techniques to make it harder to copy or reverse engineer.
Nevertheless, even with your best efforts, thieves can still sometimes gain access to your source code. When this happens, having legal protection can give you further options.
The most basic legal protection you can have is copyright. This prevents unauthorized distribution or duplication of your app’s source code. If anyone tries, you can file a lawsuit against them.
However, the limitation of a copyright is that it can only protect the source code itself.
A thief can still get around that by writing their own source code that replicates what your app does. That doesn’t count as a violation because, technically, they didn’t use your source code directly.
If you want to protect both the source code and the idea behind it, you need to take out a patent. A patent can protect a proprietary idea, trade secret, knowledge, or technology that’s central to your app’s function.
Finally, make sure to have written agreements with consultants, freelance developers, and other outside entities that will work on your Fintech app.
Include a clause about who legally owns the source code to avoid any confusion or possible loopholes.
Navigating the Risks Is Key to Fintech Success
As you can see, creating a Fintech app is challenging and laden with risks. When those are not properly addressed, you can be left facing a whole slew of financial and regulatory problems.
But simply being aware of these risks already gives you a big leg up over many other Fintech app developers because you’re already aware of what you’re up against.
Now, all you need is a captain and a trusty crew to help you navigate them.
That’s where DECODE comes in. With our vast experience in developing successful and compliant Fintech apps, we can help your project move forward.
Reach out to us today, and let’s start a conversation!