Why instant loans are catching fire with fraudsters

Shoppers now have endless options when it comes to credit.

Many are drawn in by the flexibility of buy now, pay later (BNPL) services, which exploded in popularity during the pandemic.

More than 17 million UK customers have now used the payment option, which gives consumers the choice to pay for goods at a time that suits them, with no interest or charges, provided that they pay what they owe on time.

Yet this doesn’t come without its own risks: BNPL is an irresistible lure for consumers and fraudsters alike. Fraudsters are now increasingly finding clever ways to exploit this innovative form of financing – paving new ways for cybercrime to go unnoticed.

Chancing their arm?

According to the FCA, more than ￡2.7 billion was spent using BNPL in the UK in 2020 alone. With such widespread use of instant loans like BNPL, the potential for loss was always going to be high.

Some BNPL users have no intention of paying their debts, walking away with goods in their baskets without paying a penny – known as ‘friendly fraud’.

Research from Cifas found that one in seven British adults confessed to committing one or more types of first-party fraud, highlighting just how many have no intent of repaying their instant loan.

This is becoming a major issue as the UK experiences financial repercussions from COVID-19. With job losses, increased taxes, and falling incomes impacting most sections of society, cash-strapped individuals are trying to get away with more and more first-party fraud to fund spending.

As credit cards and personal loans are much more heavily regulated and restricted by banks, it is easier for consumers to fund their spending with BNPL.

Imposters on the rise

BNPL also lures in third-party fraudsters – or ‘malicious actors’ – who take advantage of BNPL for account takeover fraud (ATO), gaining control of an account to pose as a genuine customer. There has been a steep increase in account takeover attempts in recent years, with a 27% rise in 2020 alone as online shopping usage surged during the pandemic.

Cybercriminals are leveraging stolen login credentials to hijack BNPL-enabled accounts. They can steal peoples’ proof of identity and create fake accounts based on this stolen data, leaving the unsuspecting victim to foot the bill. Fraudsters may also hijack genuine customers’ accounts, allowing them to make unauthorised purchases and steal personal data.

It is easy for instances like this to slip through the net unnoticed, as there are often loopholes in the account enrolment process for BNPL loans. Many firms don’t conduct formal credit checks at the point of sign-up, instead relying on internal algorithms to determine creditworthiness based on the available data. BNPL providers that don’t perform a formal review of an individual’s credit status risk attracting fraudsters to their platform. These bad actors are drawn in by the lack of verification and without better protections put in place, the problem will only continue to worsen.

Fighting fraud with data-centric solutions

While tackling BNPL fraud is far from easy, anti-fraud solutions powered by machine learning and shared global intelligence can help. By crunching thousands of data points such as age, location, and buying habits, these solutions help to determine the likelihood of a transaction being fraudulent. By authenticating users behind the scenes using machine learning, BNPL providers are able to continue providing a frictionless user experience for legitimate customers.

To minimise the risks of ATO, firms can also opt for biometric facial detection capabilities to enrol new account holders and verify that they are who they’re claiming to be. With this extra layer of protection, fraudsters will not be able to open new BNPL accounts with stolen or synthetic identity data.

With first-party fraud, the lines are a little more blurred. Some merchants and card issuers are wary of accusing customers of lying, so instead prefer to write-off lower value transactions. But, in the face of more regulation coming to the fore this year, clamping down on ‘friendly fraud’ is critical to help BNPL providers protect their bottom line.

Data-centric fraud solutions help by providing the foresight to know if a customer has previously not paid for their items or missed payments, enabling the BNPL provider to make an assessment of whether to continue with the transaction.

Safer sales solutions

The flexibility and convenience of BNPL has resulted in skyrocketing growth in recent years, but this comes hand-in-hand with a surge in fraud. Ramping up fraud protections is crucial at a time where customers are racking up unprecedented levels of debt using BNPL, fraudsters are exploiting the payment option, and organisations face huge losses as a result.

To tackle rising fraud, organisations must now embrace intelligent, data-driven technologies to help stamp out fraud before it happens – or risk “buy now, pay never” becoming the norm.

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