The Digital Shield: Using AI to Enhance Card Fraud Prevention for Neobanks

Using AI to enhance card fraud prevention for neobanks 

Neobanks operate in a hyper-accelerated environment. They offer instant account opening, virtual cards, and frictionless mobile experiences. While this attracts millions of customers, it also attracts fraudsters who exploit the speed and “card-not-present” (CNP) nature of digital banking. Neobanks face unique threats like card testing attacks (where fraudsters test thousands of stolen card numbers) and tokenization fraud. Traditional fraud systems, built for the slower pace of legacy banking, are too reactive. Using AI to enhance card fraud prevention for neobanks is about building a real-time, autonomous immune system that can analyze transaction sequences in milliseconds and block attacks before they drain customer funds. 

The Neobank Threat Landscape 

Neobanks are digital-first, meaning nearly 100% of their transactions are electronic. This creates specific vulnerabilities: 

1. Card Testing (BIN Attacks): Fraudsters use automated bots to run thousands of small transactions (e.g., $0.50 donations) on stolen card details to see which ones are valid. This clogs the neobank’s payment rails and racks up massive authorization fees. 
2. Speed as a Vulnerability: The promise of “instant” notifications and transfers means fraud detection must happen in sub-second latency. A delay of even 2 seconds to check for fraud ruins the user experience. 

AI Techniques for Real-Time Defense 

To combat this, neobanks deploy specialized Deep Learning and Sequence Modeling techniques. 

1. Sequence Modeling with RNNs and LSTMs 

Fraud is rarely a single event; it is a sequence. A legitimate user has a predictable “story” of spending (e.g., morning coffee -> subway commute -> lunch). Fraudsters break this story. 

1. Long Short-Term Memory (LSTM) Networks: These are a type of Recurrent Neural Network (RNN) designed to remember past data in a sequence. An LSTM model doesn’t just look at the current transaction; it looks at the last 50 transactions as a continuous narrative. 
2. Contextual Anomaly: If a user typically spends small amounts in London, and suddenly there is high-value electronics purchase in Miami, a standard rule might catch it. But LSTMs catch subtler patterns: e.g., a sudden burst of small transactions at 3 AM followed by a large transfer. The model recognizes the change in tempo and sequence, flagging it even if the individual amounts are small. 

2. Geolocation and Device Intelligence 

Neobanks have a unique advantage: the mobile app. This provides a wealth of telemetry data that traditional banks often lack. 

1. Location Match: AI compares the location of the transaction (merchant location) with the real-time GPS location of the user’s phone. If the card is used in Paris, but the phone is pinging from New York, the probability of fraud is near 100%. 
2. Device Fingerprinting: AI analyzes the device’s telemetry. Is the transaction coming from a known, trusted device? Or is it coming from an emulator or a device with a rootkit installed? AI models can detect the “signature” of bot networks attempting card testing attacks based on their device configurations and network latency patterns. 

Operationalizing for Zero-Friction 

The goal of AI in neobanks is not just security, but frictionless security. This is achieved through Risk-Based Authentication (RBA). 

Instead of blocking a suspicious transaction outright (which angers customers), the AI triggers 3D Secure (3DS) or an in-app confirmation. If the risk score is low, the transaction passes instantly. If it’s medium, the user gets a push notification: “Did you just spend $50 at Target? Tap Yes to approve.” This puts the customer in control. Additionally, AI systems can detect a card testing attack (e.g., 1,000 auth requests from one IP) and automatically generate a temporary blocking rule for that specific BIN or IP range, neutralizing the attack in seconds without human intervention. 

By utilizing sequence modeling and mobile intelligence, neobanks can deliver on their promise of speed and convenience without sacrificing security. 

Ready to protect your neobank with real-time AI? Book a call with Innovify today. 

CTA – https://innovify.com/book-call-with-innovify/