10 August 2022 |

Fintech Fraud DAO Is Helping Companies And Operators Detect Fraud Faster


One of the most prevalent and pernicious issues in consumer fintech over the past decade has been the amount of fraud. Nearly every company suffers from significant fraud issues and, over time, many of them have figured out creative ways to mitigate it. Over the past 5 years or so, new infrastructure companies have tried to make it easier for new consumer fintech platforms to limit the amount of fraud in an ecosystem, which has been a game-changer for helping new companies get to market faster. 

Fintech fraud happens in a lot of different ways: identity theft, impersonation, spoofing -to name a few. All these are simple methods for a fraudster to sign up for a fintech account, tie a bank account to that system, and then drain the user’s bank account with the fintech app. Another way that’s still technically fraud is moving a lot of money onto a fintech platform from a bank account and having the fintech company front the money movement to make it faster for the user…but then that leads to the user overdrafting their bank account and eventually, the fintech platform is on the hook for the fraud. 

Account onboarding and money movement are two of the biggest fraud catalysts in a fintech company’s ecosystem, but they’re not the only ones. Companies like Unit21 have made it a lot easier for companies to detect that kind of fraud, and others, through data infrastructure and no-code solutions. 

A lot of people in fintech and financial services think that fraud and other systemic issues can be better solved through partnerships and coordination between different companies. If a fintech platform shared data anonymously about bad actors on their platform, then new fintech products can adjust their risk accordingly based on that collective data. 

Now, of course, there are some incentive issues there—when I started out in fintech, a banker once told me that consortiums are a nightmare to manage because if you have 5 people in a room you’ll end up with 7 opinions. If I’m a later stage fintech company, why would I want to help a new fintech platform mitigate fraud? It was a nightmare for them to manage, and it should be a nightmare for everyone else—and with the consumer fintech landscape getting more and more competitive, keeping fraud data as their moat might make sense to them. 

Unit21’s Dhiraj Bhat and Clarence Chio came up with an innovative idea to not only create a fintech consortium around fraud but the right incentive model to encourage partnership and collaboration too: the Fintech Fraud DAO

The decentralized network offers participants two key benefits: it not only shares which accounts have been flagged as fraudulent, but also offers an aggregated look at activity across all network participants. So, if a fintech platform is onboarding a new user, John, and queries the network to get signal on John, the decentralized network will share:

  • John has been active for 11 out of the last 12 months in a bank, transacting an average of less than $1k per month, and has been flagged in 4 alerts before, and blocked once.
  • John has been active for 19 months out of the last 24 months on P2P payment platform, transacting less than $100 per month, has been flagged in 1 alert before, but not blocked

The decision to provide a raw signal pertaining to individuals was influenced by Unit21’s experience with building risk and compliance tooling for fintechs. The team has observed that only very small subsets of their clients use fraud tools the exact same way – risk thresholds, regulatory tolerance and risk aversion vary from company to company, and an aggregated, generic signal mitigates any potential data discrepancies or cross-participant conflicts. 

The DAO doesn’t make any decisions or recommendations— it just returns signals that companies can use as new inputs in their own fraud detection systems. However, because the signals are an aggregated look at a consumer’s lifecycle across a number of platforms, in theory it would provide a much more comprehensive look. These signals can serve a number of purposes for a consumer fintech company: it can help companies identify whether users are legit or not, help with investigations to see if these users exhibit any history or patterns of fraud, and finally allow companies to share positive or negative data around a user. 

Becoming a member is unique too: there’s no “pay to play” here. The DAO has a “give-to-get” model, where companies and teams can only get the anonymized datasets from the DAO if they first participate in it and upload their own data.  

Consortiums are notoriously hard to manage, which is why Chio and Bhat decided to develop this as a DAO on the Polygon network. Not only does a DAO easily allow for a “give-to-get” structure, it also simplifies coordination and governance. Tokens are granted on a periodic basis, and distributed based on the volume of data provided to the DAO—the more you contribute, the more governance tokens you get in the Fintech Fraud DAO. Those tokens allow companies to vote on two things: members in the DAO and network mechanics (how the DAO works and operates.) Even though the DAO was built and will be managed by Unit21, it operates completely independently from their industry-leading risk and compliance tools, and is decentralized from an administration perspective. 

One other need that the team fulfilled was the injection of subject matter expertise. Bringing on someone of Lou Anne Alexander’s experience has been immensely helpful. Lou Anne has spent the last 30 years in the banking industry, 15 of which were spent building the industry-defining Early Warning Services (EWS), co-owned by the top 7 banks in the US and operated jointly. Similarly, Zelle – which is one of the largest peer-to-peer payments systems in the US, was also jointly built and co-owned by bank partners—this made it a lot simpler for bank partners to integrate Zelle directly into their banking apps, which led to massive distribution for the P2P money transfer app from Day 0. Even payment networks like Mastercard initially started out as a joint venture between a lot of institutions that wanted to better compete with BankAmericard (which ended up becoming Visa.) 

As Lou Anne says herself – Fraud fighting should be a collaborative effort that is seen as a ‘must have’ rather than as a ‘nice to have’. 

To me, the Fintech Fraud DAO is a great experiment to see whether DAOs can solve a lot of coordination problems with consortiums. Plus, the use case is incredibly valuable for fintech companies, so I’m excited to see how the future of the DAO develops. Early members include crypto companies like PrimeTrust, and fintechs like Brex and Airbase that are looking to get ahead of an age-old problem.

If you’re a fintech or a crypto company, I highly recommend giving it a shot—you can contact the team at [email protected] or join the Slack community here