As digital financial services become more advanced, so too do the efforts of malicious hackers and fraudsters to crack into those valuable systems, as do the efforts of regulators to build better structures to avoid that abuse.
To help the finance sector meet those demands, an Amsterdam-based startup called Fourthline has built a set of AI-based solutions to help with identity verification, help businesses comply with anti-money laundering rules and more. Today, it said it has raised €50 million ($54 million) in funding to expand that technology.
The all-equity round is being led by Finch Capital, with other undisclosed investors (one of whom is a strategic institutional partner, I’ve been told). Fourthline has been around since 2013 — building its tech for five years before commercially launching in 2018 — and it has been mostly growing on its own steam, with only €70 million raised to date, including this latest €50 million injection. The valuation of the company is not being disclosed.
In the five years since its launch, growth has been impressive: Fourthline’s customers include N26, Qonto, Trade Republic, FlatexDEGIRO, Scalable Capital, NN and Western Union, as well as marketplaces like Wish. And business has grown 80% annually in the last five years. In all, it says its tech helps vet “millions” of consumers every year.
At a time when we are seeing a lot of controversy about the potential for artificial intelligence to be misused and abused, the problem that Fourthline is tackling, in a way, is one perfectly suited to powers of artificial intelligence in the best of ways.
Its premise is based on a few key facts: There are many routes bad actors can take to exploit digital financial services, whether that’s by stealing data, by impersonating people or taking other approaches to steal money or move funds illicitly. Humans are obviously an important part of the solution to combat that. But the proliferation and growing sophistication of malicious approaches, which are coming from humans but also machines and sometimes AIs, makes the challenge of addressing those malicious approaches and fraud attempts increasingly difficult.
Thus, the thinking goes, AI-based approaches that use computer vision, machine learning and immense data crunching to detect when something is not as it should be are not just helpful, but a must-have.
Fourthline’s technology currently encompasses around 200 checks, covering areas like examining ID documents, parsing biometric data, checking records for place of residence, verifying names against sanction lists and more. Some of these might be straightforward database checks, but others are very much complex moving targets. That part will be getting more R&D resources with this round of funding on top of what Fourthline has already invested.
“We’ve invested heavily on the authentication side,” Krik Gunning, CEO and co-founder of Fourthline, said in an interview. That includes, he said, “looking at ID and passports in different ways.”
The company claims this approach is able to identify 60% more fraud with an accuracy rate of 99.98%.
There are a number of startups that already exist to help fintechs and others be compliant in areas like KYC (know your customer) regulation and ID verification, but Gunning pointed out that the norm is to take a very different approach: companies have largely built solutions that typically lean on using APIs and core technology built by third parties, which is then customized by the startup in question.
Fourthline has taken an alternative view: it’s better to build your own technology from the ground up using your own proprietary data sets, as this makes it easier to control and modify, and of course, in the long run, it also brings it better service margins, too.
“We use our own OCR [optical character recognition] model for the number zone and another for the visual zone to check if it’s been tampered with. And yes, many have that, too, but we are then also able to address the flip side of that, which is much harder: to confirm if something is authentic but also pinpoint the reason why it might or might not be so.” This involves deeper investigations of ghost images and being able to understand even the lighting used in creating an image. “We’ve invested a lot to do this.” That is one key reason why it took years for the company to launch a single product.
The company has a very streamlined view of how it goes to market. There are, for now, no plans to build services beyond KYC, AML and ID verification. So while credit scoring might look like a very adjacent and obvious opportunity, it’s not one that Fourthline will be pursuing for now. Similarly, this is why it’s only concentrating on the financial sector and not applying its tech or looking at business development with the many other sectors that might also buy ID services. Governments, which have tried to create universal ID schemes — with very fragmented results — are not customers. At least not right now.
“There are a lot of companies in this space that do a lot with AI, but in all honesty, it takes a lot of time, investment, knowledge and training before you can get AI models to the level you want,” he said. “The only way you can do it is by focusing. We couldn’t do this for every sector in every region in the world, so this is why we do this where we can play a role. That is why we focus on financial institutions in Europe.”
In a market rife with highly capitalized startups that have found it a struggle to live up to their valuations and growth expectations, Fourthline’s streamlined focus, proven returns and, importantly, technology built by its own engineers are examples of what is resonating with investors now, and what is likely seen as a more healthy basis for growing down the line.
Radboud Vlaar, managing partner of Finch Capital, described it with as much economy as Fourthline has taken with its own approach: “We’re big believers in tackling the compliance challenges in this industry through a focused growth strategy leveraging a platform approach using proprietary technology.”