Buy now, pay later (BNPL) is accelerating globally. In the U.S. alone, one in four consumers (26%) have used BNPL at least once in the past six months, rising to 51% of Gen Z and 42% of millennial shoppers, according to 451 Research’s Q3 2021 Voice of the Connected User Landscape (VoCUL) survey. With high rates of adoption, the BNPL market is now becoming a victim of its success. Fraudsters are zeroing in on the growth opportunity presented by BNPL and are eager to exploit poorly secured account opening and login flows. Instances of new account fraud and account takeover (ATO) fraud are rising, and BNPL providers are on the hook for the consequences.
Rising competitive and macroeconomic pressures are amplifying the threat that new account and ATO fraud pose for BNPL providers. At a time when strong performance is essential, BNPL providers cannot afford the tax – in the form of chargeback fees, losses, margin pressure and operational distractions – that fraud places on their business. Failure to prevent fraud also undermines consumer trust, which already ranks as a top five inhibitor to BNPL adoption according to the VoCUL survey, and it may invite further regulatory scrutiny.
The true challenge for BNPL providers is to ramp up fraud-prevention processes without compromising their user experience and approval rates. Successful execution requires establishing a level of trust in each interaction at each customer touchpoint. This is predicated on an understanding of identity. With this in mind, we advise BNPL providers to:
- Harness a combination of identity signals (e.g., geolocation, account age, trusted ID, login velocity). Augment these with device fingerprinting and behavioral biometric inputs to make more informed decisions during onboarding, login and payment.
- Incorporate user behavior and device inputs (e.g., has the user ever spent this much before? Shopped at this merchant? Been associated with this IP address? Is the device jailbroken?). This will help improve detection of genuine users, move away from a reliance on passwords for authentication, reduce friction and better identify ATO scenarios.
- Leverage digital identity networks. Take action on identity data by determining the behavior and outcome associated with the same (or similar) combination of identity attributes that have appeared elsewhere in the network.
A key benefit of an identity-based approach to fraud is precision targeting of individual instances of suspicious or abusive behavior. This helps preserve the user experience for good customers by ensuring friction is only introduced when risk levels warrant it. For instance, a login with a suspicious identity can be passively layered with behavioral biometric inputs (e.g., keystroke analysis), which are less intrusive for the user and can help prevent fraud stemming from stolen account credentials (e.g., passwords, traditional PINs) and SMS one-time passwords (e.g., via phishing, SIM swapping).
Ultimately, leveraging user behavior and device data in conjunction with a digital identity network puts BNPL providers in a better position to secure the end-to-end customer journey without compromising the user experience. This approach has the dual benefits of reducing friction while improving the detection accuracy of legitimate users.
For BNPL providers to build sustainable, long-term growth, they must start by creating trusted interactions at every step of the customer journey, from account opening to login to payment. Failure to generate trust will increase regulatory pressure and compromise their customer relationships, bottom line and market potential. Given that data collection is limited during enrollment, BNPL providers must rely on digital identifiers to build a more robust view of the risk level associated with each interaction.
Behavioral biometrics and device fingerprinting harnessed in conjunction with digital identity networks help to build more complete views of user risk and intent. This puts BNPL providers in a position to make more accurate decisions (reducing losses and false declines), while ensuring that legitimate users’ journeys are streamlined and uninterrupted (helping drive loyalty and improved customer experiences).
451 Research have published a Vanguard Report, commissioned by Callsign, looking how BNPL providers can fend off growing instances of new account fraud and account takeovers (ATOs) without impacting their customer’s experiences. Download your complimentary copy here
Article written for Callsign by:
Jordan McKee, Customer Experience & Commerce, 451 Research