Exploring the Benefits of Blockchain Technology in Fraud Detection and Prevention

In today’s digital landscape, there is a significant risk of data breaches, cyber thefts, and other such frauds. Digital transformation has enabled fraudsters to find new lines of attack and exploit vulnerabilities. Fraud has always been a detrimental factor in the business world, particularly in the financial industry, causing fear in users when they make transactions, process insurance applications, assess claims, or do any such financial activities.

This graph which shows the average cost of a data breach in US from 2006 to 2022 is quite an eye opener for organizations when it comes to understanding the value of keeping security measures in place.

To prevent this, businesses need to have a fraud-proof solution in place that can facilitate customers protect their personal data and transactional history. Thankfully, there is a technology that can efficiently detect and prevent such fraud: Blockchain (a decentralized digital ledger).

How does Blockchain Technology work and why should you care

Blockchain has been a buzzword for several years now. It is a decentralized solution that uses a distributed ledger to produce an immutable and dependable record that can only be accessed by people with permission.

In simple words, blockchain is a digital ledger that stores transactional records in a safe and transparent manner. The ledger consists of blocks storing data, and each block is linked to the previous block, forming a chain of blocks. Once a block is added to the chain, no one can change, alter or delete it to their advantage, providing a high level of security and transparency to the users. 

Every transactional record and data stored at blockchain is verifiable and tamperproof, assisting insurers in utilizing consistent and reliable data. Blockchain can build trust and transparency across the BFSI market and other business industries, minimizing the risk of vulnerabilities fraudsters exploit for their profits.

Here is a useful infographic that can further explain the process:

For instance, blockchain helps detect and prevent double-dipping fraud. When someone approaches multiple insurance companies to file a claim, the blockchain prevents the invalid submission from the same claim by providing a clear audit trail, checking identity, and verifying the provenance of insured items.

Commonwealth Bank of Australia (CBA) and Morgan Stanley in the BSFI market, Nestle and Walmart in supply chain, and other reputed businesses across the industries are already leveraging the power of blockchain applications to safeguard their systems and provide a secure experience to their consumers.

Use Cases of Blockchain for Businesses

Blockchain is an emerging tech trend, revolutionizing businesses across industries. Here are some of the most common use cases of blockchain for business:

Supply Chain Management

Blockchain can track and trace goods transported through the supply chain, providing transparency and accountability. It helps reduce fraud, increase efficiency, and improve customer experience. This has been implemented by Walmart to improve and secure their supply chain operations

Digital Identity Verification

Blockchain provides a secure and decentralized digital ID that helps prevent identity theft and fraud.

BFSI Market

The banking, financial services, and insurance (BFSI) market has been leveraging the power of blockchain technology since its introduction to the tech world. In the BFSI market, blockchain helps improve efficiency and transparency, enabling faster and more secure transactions and reducing fraud.

Intellectual Property Rights

Blockchain helps create a secure, transparent, and tamper-proof record of intellectual property rights, facilitating businesses to protect their patents, copyrights, and trademarks.

Healthcare

Blockchain in healthcare systems facilitates a transparent and secure sharing of medical records, leading to improve patient care and reduce healthcare costs.

Now that we know how blockchain works under the hood and its various use cases, let’s explore its benefits in fraud detection and prevention.

Benefits of Blockchain in Fraud Detection and Prevention

While the uses of blockchain are often associated with supporting Bitcoin transactions, the powerful role of blockchain in the business world extends far beyond cryptocurrencies. One of the areas where blockchain technology can have a significant impact is fraud detection and prevention.

Let’s dive deeper to know the multiple benefits of blockchain in fraud detection and prevention.

Immutable ledger

Immutability is one of the most significant use cases of blockchain, making it a revolutionary technology for fraud detection and prevention. Once data or transaction is stored in the block, they can’t be modified, altered, or removed. It means any suspicious attempt to tamper with the transaction will be detected and prevented in real time, making it intimidating for fraudsters to exploit the vulnerabilities.

Transparency

Transparency is another remarkable feature of blockchain, making it an effective technology in fraud detection and prevention. Since all the transactions in the blockchain are visible to every member with permission, any changes to the ledger are recorded in real-time and visible to everyone. So, if anyone tries to tamper with the data, their attempt will be detected immediately, and they can’t carry out their fraudulent activities.

Decentralized Nature

Blockchain is a decentralized, distributed digital ledger that records data and makes it visible to all authorized members. In a traditional centralized system, fraudsters can alter the data to their advantage by hacking into a central database. But, since blockchain is a decentralized technology, there is no scope for fraudsters to execute their malicious activities 

In the decentralized network, only authorized persons from different departments can access, share and control current and previous data. It enables all authorized members to detect faulty transactions without needing a central authority, preventing possible human errors, frauds, and waste of time.  

Smart Contracts

Blockchain facilitates smart contracts, which are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code. The smart contract triggers an alert when a transaction is done outside business hours or exceeds a certain amount.

As quoted by Forbes,

“The smart contract allows both buyers and sellers to create “if / then” contracts, which means one step of a process will not be fulfilled as long as the one before it is verified completely.”

It can help automate fraud detection and prevention in businesses across industries. For instance, In the insurance industry, as soon as a customer provides all the essential documentation to file a claim, the claim will automatically be settled, reducing the risk of human errors, reliance on third parties, and fraudulent activities.

Authentication

Identity theft is one of the most common fraudulent activities, severely affecting consumers across the globe in the last few years. Blockchain-based authentication system helps verify the user’s identity, helping to prevent identity theft. It ensures the tamperproof security of the digital ID of a person.

The blockchain network is created based on a request for authentication and permission. It means everyone can’t access the system and service; only authorized parties with permission can access a single version of the real information, and a known party can verify transactions. Thus, blockchain provides secure and authorized access to data and prevents fraud.

Audit Trail

Blockchain’s audit trail feature can add value in detecting and preventing fraud. The transparent record of all transactions is stored in the immutable ledger, making it quick and easy to trace the origin of a transaction. Accordingly, it helps identify fraudulent activities and prevent future occurrences of fraud.

Final thoughts

In today's digital age, fraud is an ever-present threat, causing financial losses and damages to a company's assets and reputation. But every problem has a solution, and here the solution lies in the adoption of blockchain.

Blockchain is a revolutionary technology that helps detect and prevent fraud by providing a transparent, immutable, and decentralized ledger that can’t be altered, deleted, or manipulated. By leveraging the features of blockchain, such as smart contracts, authentication, and audit trail, businesses can build robust fraud prevention systems that trigger real-time alerts to prevent fraudulent activities.

As blockchain use cases continue to evolve across industries and gain wider adoption, we can expect to see more innovative approaches to secure the digital landscape. Thereby, it is imperative for businesses to embrace blockchain infrastructure as a service to protect themselves and their customers.