Emergence of Cybersecurity Risks in Fintech Industry
- 12 August 2020 | 663 Views | By Abhinav Mishra
Fintech has completely transformed the entire financial industry by not only improving the services and products offered by traditional financial services but also offering an alternative to conventional financial solutions. Despite the rapid growth of the fintech to transform the global market, there is some risk in the industry.
In this article, we are going to talk about cybersecurity risk in the fintech industry.
What is Cyber Risk?
Cyber risk commonly refers to any risk of financial loss, damage, or disruption to the reputation of an organization resulting from the failure of its information technology systems. The cyber risk could occur in the below scenarios:
- Unauthorized and deliberate breaches of security to gain access to information systems.
- Unintentional or accidental breaches of security.
- Operational IT risks which can occur due to poor system integrity.
Poorly managed cyber risks can leave companies open to a variety of cybercrimes, with consequences ranging from economic destitution to data disruption. In many cases, businesses will also find themselves in the middle of a public relations nightmare since recovering lost assets won’t be easy and they also have to make sure there is no further theft.
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Below are hidden cybersecurity risks of fintech industry:
1. Third-party security risk
Banks once they decide to leverage fintech solutions, have to interact with external fintech companies for software integration, and hence internal security is not always enough for them. Since they are interacting with not so trusted service provider, it is always a risk they can lose their data, experience service failures and suffer a loss of reputation if any security breach happens and is made public. There are a number of ways to eliminate the risks, the foremost thing banks and financial institutions should do is to consider fintech relationship-related risks in their risk management assessment.
2. Data Breaches
Data is the gold in today’s time, it plays a crucial role in the growth of all sorts of businesses and industries including the financial sector. When it comes to the financial industry, data is of utmost importance since financial institutions store not only the personal data but also the financial data like payment details of the customers. With the rise of online digital services, the problem of the data breach has also increased to a great extent. Since the data is now available on the online platforms, attackers can seamlessly access the sensitive information of the users. For the same reason, online transactions are becoming more prone to cyber thefts.
3. Compliance failures
The financial industry has a number of compliance parameters to check and consider when it comes to implementing any solution. However, when fintech startups implement any solution compliance becomes a big challenge for them as compliance is not their primary objective. They are not subject matter experts in this area since depending upon the type of business operations and regulations, fintech startups may have to comply with different compliance and regulatory requirements. If the startups fail to meet those obligatory compliances, problems like regulatory fines and data breaches take place.
4. Malware Attacks
Hacking and malware attacks are the top security issues for all types of industries across the globe. The banks and financial institutions have vulnerabilities in their processes, and the hackers take advantage of these vulnerabilities to launch malware attacks. Society for Worldwide Interbank Financial Telecommunication, popularly known as SWIFT, is a system used by almost all the top financial institutions and banks to exchange important financial information. SWIFT infrastructure has recently had cyberattacks which show the level of sophistication of the hackers and malware attackers.
5. Cloud-based Migration
Global fintech companies mostly use cloud-based solutions for their services. It makes the online payment secure and effective for the users and also provides ease and efficiency. However, despite the robustness of the cloud-based services, the fintech startups can experience leaks in sensitive financial information and data breaches if they partner with an inefficient cloud-based service provider. Therefore, fintech marketers need to stay wise and updated while partnering with the service provider. Banks need to opt for a reliable cloud service provider, who can offer customized and secure cloud solutions. If banks and financial institutions use inefficient and cheap cloud services, it can cost them big in case of an attack.
6. Management of Digital Identities
Management of digital identities of the businesses and consumers is a key challenge for the fintech companies. The digital identities are increasingly being used nowadays to enable omnichannel and integrated experience for the users. Financial institutions power their mobile apps with biometric sensors like fingerprint scanners to authenticate the users and enable authorized access to services. Apart from biometrics, mobile apps use code-generating apps and one-time passwords (OTPs) for user authentication. These practices are more secure than conventional screen patterns, passwords, and PINs.
At one front, digital identities have strengthened the level of fintech cybersecurity and on the other, it has become complicated to manage and clone all these identities. For example, a large number of unique OTPs are needed to be generated every day for authentication. If these identities are stolen as part of cyberattack, the attackers can access the confidential data and steal huge sums from consumers’ accounts. Fintech enterprises must use patented and reliable data backup and disaster recovery services powered by modern technologies like cloud, artificial intelligence (AI), and machine learning.
7. Traditional Banking System
The banks that have been into the business for a number of years are still running on outdated technologies and have a vulnerable security system. When fintech startups provide solutions to such banks, the risk factor increases related to cybersecurity. When these tech-friendly fintech solutions integrate with the existing banking solutions, they too become the main target of the attackers and hackers. Hence, a financial institution and banks first should refresh and upgrade their core banking system before implementing fintech solutions in their business.
8. Money Laundering Risk
Money laundering has been always a concern for financial institutions and banks. With the industry moving towards digital, the money laundering is expected to grow if no checks are put in place. Banks using fintech services mostly use cryptocurrencies that are not formally regulated by any set of standards and global regulations. The frequent use of non-regulated currencies results in terrorist funding and illegal money laundering. Identifying the beneficiary in any fintech-enabled transactions is not possible due to fintech’s pseudonymous nature. In other words, it won’t be wrong to say that money laundering operation get support from the fintech services, indirectly.
It is very important to reduce the number of hacking activities because if hackers are unbeaten in their efforts to access the fintech platform with ease and efficiency, the faith of banking customers in the technology-driven fintech platform will significantly reduce. The need of the hour is to have a balanced innovation that promotes the growth of the fintech industry and mitigates the hidden risks of fintech services.
How can we manage Cybersecurity Risk?
It is very important for companies to implement a cyber risk management strategy, it will help them to identify the threats to the organization. It will also help them address the risks and put the correct defenses in place which will eventually reduce the threats from cyber-attacks. Here are a few things organizations can do –
- Internet gateways, boundary firewalls, or comparable network mechanisms should be in place to protect systems, information, applications, and devices against unauthorized access and exposure to the internet.
- Devices connected to a network must be configured to make sure that they can only provide the services required and are not given access to surplus systems or networks.
- User accounts should allow for the minimum level of access required for devices, applications, and networks. Only authorized individuals should be given special privileges to manage controls.
- Where systems are connected to the internet, malware protection software should be installed to protect against malicious software such as viruses and spyware that try to perform unauthorized functions on computers.
- Speedy reaction to potential risk is a must for an organization. The company should have early recognition of the potential risks, immediate identification of the breaches and attacks, and rapid response to security incidents.
Can a cyber attack cause a systemic impact in the financial sector?
Systemic risk is the possibility that an event at the company level could trigger severe instability or collapse in an entire industry or economy. Now coming to question – can cyber attach cause a systemic impact? There is not a uniform view of the link between cyber risk and systemic risk – some query the connection whereas others assume a direct link. The vast majority of independent cyber attackers are unlikely to have the capability to systemically impact the financial sector. However, the financial sector has many environmental features that are conducive to a systemic cyber compromise. There are no current examples of systemic cyber risk impacting and crystallizing the real economy but this does not mean the system is completely risk-free. There are a few credible cases to link cyber risk to systemic risk in the banking and financial sector.
How do you mitigate systemic risks?
The financial sector generates systemic risk and this risk can be highest precisely when it looks lowest. Below are some of the ways to mitigate systemic risks:
- More efforts on the development of the intelligence-led approach to cybersecurity.
- Create policies to deal with system-wide inter-linkages and with too-big-to-fail and moral hazard issues.
- Financial institutions should accept that compromises are likely to happen and therefore prioritize response activities and recovery measures.
- Undertake further studies to better understand the relationship between authenticity and data integrity, the potential for real-economy impact via a cyber attack, and the trust in financial services.
- Banking institutions to focus on risks associated with third-party dependencies.