In our previous post, we discussed how Buy Now, Pay Later (BNPL) financing has become more popular in recent years. Why consumers are choosing this method of financing over credit cards and more traditional forms of financing and payment include:

  • Greater Access to Credit
  • Convenience
  • Ease of Use
  • Low-Risk Money Management

However, like with other loan and credit products, finance companies, banks, and credit unions offering BNPL must be able to manage fraud and credit risks along with reputational and opportunity costs in order to be successful. In our experience in online consumer lending, we’ve learned that assuming more originations would inherently lead to profitability can prevent an organization from establishing the processes and procedures necessary to effectively manage those risks. Today, we’ll take a closer look at fraud in BNPL.

In addition to first-party fraud, where a customer takes on financing with their own information without any intention to pay, there are two other forms of fraud that BNPL players need to be aware of:

  1. Third-Party Fraud occurs when a fraudster uses someone else’s information to make a transaction without that person’s knowledge. A fraudster may use a stolen identity to apply for BNPL financing and disappear. Or, a fraudster may use stolen credentials to take over an existing customer account (account takeover fraud) so that they can “purchase” goods without having to pay. The challenge with detecting third-party fraud is that the fraudster is hiding behind a valid consumer or customer’s identity.
  2. Synthetic Identity Fraud is a modified form of third-party fraud and occurs when a fraudster combines real and fake data to form a fake or synthetic identity that is used to make a transaction. Fraudsters may start with a valid Social Security Number then create a fake name, address, and other personal information. With this synthetic identity, fraudsters begin building a real credit profile that can give them access to loan and financing options like BNPL. The challenge with detecting synthetic identity fraud is that the synthetic identity has a good credit score.

Different methods of fraud require different methods of detection and prevention and in an online environment, you don’t have the luxury of time to scrutinize every application or transaction. As a result, organizations either subject all customers to the same cumbersome identity verification and authentication process or ignore fraud and focus on mitigating credit risk instead. The former leads to a poor customer experience and the latter false positives as creditworthy applicants are denied financing to make up for fraud losses. In the long run, either approach is detrimental to organizations. 

A better approach is leveraging data, analytics, and technology to automatically identify clear cases of non-fraudulent and fraudulent activity so that your investigations team can focus their energy reviewing the unclear ones. But that requires the know-how and infrastructure to be able to integrate and orchestrate disparate sources of information. That’s where Enova Decisions can help.

Continue to Part 3: Dig Now, Win Later; Skip Now, Lose Later

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