There are many uses and benefits of open banking. Open banking helps to bridge the gap between people’s financial information and third-party services. Moreover, clients can access a broader range of customized financial products and services.
While open banking offers numerous customer benefits, it also introduces vulnerabilities that fraudsters can exploit.
Here are the risks of open banking fraud:
- A Larger Ecosystem: Open banking involves multiple players, including data providers, third-party providers, customers, regulators, and government agencies, increasing the potential points of data security failure.
- Account Takeovers: Accessing banking information is a lucrative target for fraudsters. They mine infiltrated accounts for personal information, currency, reward points, or cryptocurrencies.
- Single Bad Actor: If fraudsters successfully bypass the initial Know Your Customer (KYC) checks, they can open neobank accounts, apply for loans, and scam every partner involved, creating a significant problem for Anti-Money Laundering (AML) compliance.
- Single Point of Attack: Multiple interconnected services offer the same single point of attack, making security and data protection critical in the open banking system.
- Information and Security Asymmetry: A false sense of security may lead to insufficient data verification, creating an entry point for criminals.
Preventing Open Banking Risks
To avoid open banking risks, organizations should:
- Secure Data: Ensure data protection at all stages, exceeding compliance requirements to minimize vulnerabilities.
- Verify IDs: Implement various security measures such as biometric identification, two-factor authentication (2FA), and digital footprint analysis to verify identities effectively.
- Vet Third-Party Companies: Conduct due diligence checks on third-party service providers that customers rely on to ensure their trustworthiness.
While open banking offers improved user experiences and choices, it necessitates robust financial risk management, risk assessment, and fraud detection to protect against open banking fraud and maintain customer trust.