How Security Startups Address Threats Driven By The Rise of Fintech Democratization

By Sergey Gribov, a partner at Flint Capital investment fund

The high level of consumer support for fintech democratization and fintech services going online is demonstrated by a record $132 billion in worldwide fintech industry funding in 2021, which was more than double the funding in 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 transfers, remote banking services, and global stock trading), there is a greater risk of fraud around ID verification, personal data breaches, and hazards.

The businesses that profit from the scenario are security startups that transform the industry by offering solutions that allow consumers to lower the risks and enjoy the benefits of fintech democratization.

They are in high demand due to the conditions neobanks find themselves in: the constant need for rapid growth means security solutions should be easily scalable and at the same time cost-effective. 

The issue is compounded by regulatory requirements that neobanks have to meet just like traditional ones. They cannot put compliance on hold, even when experiencing rapid multifold growth. And those that do make this mistake risk facing investigations and heavy fines from the regulators. 

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

First of all, neobanks and all-digital financial services providers often struggle with identity verification as clients’ visits to the brick-and-mortar branch are no longer required. It is becoming increasingly difficult to tell if a person online is real or is just an avatar for an identity fraudster. The importance of this challenge has recently been illustrated by PayPal’s disclosure of removing 4.5 million fake user accounts from its network.

This is where startups like AI-powered Socure come into play. It offers a multifaceted picture of a client's identity based on predictive analytics from trusted online and offline data sources. This allows to verify identities in real-time and offer financial services even for populations invisible to traditional banking, such as a big part of the Gen Z and low-income consumers. According to Socure CEO Johnny Ayers, these demographic groups account for about 35% of its customers, proving their demand for financial services that once were out of their reach. 

Secondly, progress toward financial inclusion means more people are making more transactions that are still subject to strict AML (Anti Money Laundering) regulations. In the recent past neobanks have already encountered multiple investigations of weak AML practices, including such key players as Revolut, Monzo, and N26. 

Security startups like Quantexa aim to enhance AML risk assessments by using AI and contextual monitoring technologies to analyze payment flows and prevent financial crime. Moreover, they can provide up to a 95% reduction in false positives, protecting customers from hyper-aggressive monitoring and accounts’ closure.

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

Startups working in this area, such as Tessian, seek to cut down human security risks and protect the employees of their client companies from themselves, giving them more time to deal with customers' needs.

Overall, security startup solutions address the inherent needs of neobanks while at the same time often providing a competitive edge over legacy financial institutions, which in turn contributes to increasing financial inclusion.