How Security Startups Are Dealing with the Threats Raised by the Rise of FinTech Democratization

By Sergey Gribov, Partner at Flint Capital Investment Fund

The high level of consumer support for democratizing fintech and bringing fintech services online is demonstrated by record funding of $132 billion in global fintech industry funding in 2021, more than double the funding of 2020.

Having easy access to financial instruments comes at a price. When financial data flows to B2B companies and neobanks that aim to offer better financial services than traditional banks (such as foreign wire transfers, remote banking, and global stock trading), there is an increased risk of fraud. around identity verification, personal data breaches, and dangers.

The companies profiting from this scenario are security startups that are transforming the industry by providing solutions for consumers to reduce risk and reap the benefits of the democratization of fintech.

They are in high demand due to the conditions in which neobanks find themselves: the constant need for rapid growth means that security solutions must be easily scalable and at the same time profitable.

The problem is compounded by regulatory requirements that neobanks must meet, just like traditional banks. They cannot suspend compliance, even when experiencing rapid multiple growth. And those who make this mistake risk investigation and heavy fines from regulators.

In other words, in pursuit of increasing financial inclusion, neobanks face several key challenges that make security startups ever more relevant.

First, neobanks and all-digital financial service providers often struggle to verify their identity, as customer visits to the physical branch are no longer required. It’s getting harder and harder to tell if someone online is real or just an avatar for an identity thief. The importance of this challenge was recently illustrated by PayPal’s disclosure of the removal of 4.5 million fake user accounts from its network.

That’s where startups like AI-powered Socure come in. It offers a multi-faceted picture of a customer’s identity based on predictive analytics from trusted online and offline data sources. This makes it possible to verify identities in real time and to offer financial services even to populations invisible to traditional banks, such as a large part of Generation Z and low-income consumers. According to Socure CEO Johnny Ayers, these demographic groups make up about 35% of its customers, proving their demand for financial services that were once beyond their reach.

Second, progress towards financial inclusion means that more people are making more transactions that are still subject to strict anti-money laundering regulations. In the recent past, neobanks have already faced multiple investigations into weak AML practices, including key players such as Revolut, Monzo, and N26.

Security startups like Quantexa aim to improve AML risk assessments by using AI and contextual surveillance technologies to analyze payment flows and prevent financial crime. Additionally, they can provide up to 95% reduction in false positives, protecting customers from hyper-aggressive monitoring and account termination.

Finally, focusing on rapid growth often leaves neobanks with a weak link in the chain: people. Personal data breaches are on the rise, especially in the new reality of working from home. And according to Verizon’s Data Breach Report, 85% of today’s data breaches are caused by human error. This amplifies neobanks’ demand for effective tools to prevent data exfiltration that can be scaled alongside customer growth.

Startups working in this area, like Tessian, seek to reduce human security risks and protect employees of their client companies from themselves, giving them more time to deal with customer needs.

Overall, security startup solutions meet the inherent needs of neobanks while often providing a competitive advantage over traditional financial institutions, which in turn helps increase financial inclusion.