The Buy Now Pay Later (BNPL) sector has seen exponential growth reaching $22.86 billion in 2022 (up to date), and is predicted to cross $90.51 billion by 2029. However, this industry is facing criticism due to its weak regulatory compliance controls as consumers build up large debts by spending on items they can not afford. Furthermore, identity theft, credit/debit card fraud, and account takeover are other reasons compromising the growth of BNPL service providers.
The increase in payment fraud is driving regulatory scrutiny for BNPL service providers. Moreover, the Financial Conduct Authority (FCA) emphasized a need for stringent regulations to counter illicit actions. BNPL service providers should invest more in enhancing their ID verification mechanisms to ensure compliance and offer services to legitimate customers.
Identity Theft – a Major Reason for BNPL Service Providers’ Criticism
Fraudsters are looking for easier and less regulated ways to hide their illicit funds. They often target BNPL service providers to make malicious purchases under someone else’s name. In case of building debt, the concerned person, not aware of the transactions, has to clear the outstanding payments. Using stolen accounts and credit/debit cards for payments is another rapidly emerging fraud trend. Creating counterfeit identities helps fraudsters escape ID verification checks. As a result, BNPL service providers can not trace the actual buyers and are left with huge financial losses.
In the case of customers, fraudulent purchases plunge them into debt and impact their credit scores. In worse cases, BNPL users can end up on the defaulter list, which means they won’t be able to avail financial services from any institutions in the future. The reason behind all this chaos is inadequate identity theft protection measures which leave enough room for fraudsters.
Financial Conduct Authority (FCA)’s Stance
The BNPL sector faces criticism due to insufficient identity verification mechanisms from both consumer interest groups and regulatory bodies. With fraud concerns facing a surge, FCA reviewed the performance of unsecured credit service providers in June 2022. Later, it called out less leniency regarding consumers’ protection. Furthermore, FCA obliges BNPL service providers to enhance their identity authentication controls to restrict fraudsters’ access.
FCA will now directly regulate and supervise BNPL service providers to ensure secure trading. Therefore, startups such as Laybuy, Clearpay, and Klarna need to protect both their services as well as consumers from external criminal risks. Synthetic identity fraud prevention solutions are enabling BNPL service providers to not only counter illicit actions and uphold their integrity but also stay put with Know Your Customer (KYC) regulations.
For Detailed Identity Verification Demo
The Need for Integrating Automated Identity Verification Services
With Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements becoming more stringent, BNPL service providers need to review their existing fraud prevention procedures. With AI-powered identity verification services, they can authenticate customers during onboarding while checking their backgrounds. Furthermore, IDV solutions automate ongoing user activity monitoring to prevent chances of building debt.
Identity authentication solutions enable BNPL service providers to ensure the users are who they claim to be. This largely benefits in countering payment and account takeover fraud. Further benefits of integrating AI-powered ID verification include the following:
Prevention Against Phishing Attacks
Fraudsters use phishing attacks to manipulate legitimate customers and steal their personal information, such as account log-ins, credit/debit card CVVs, and other such details. They later use stolen PII to either create synthetic profiles or directly pay for their purchases. While phishing attempts assist criminals in concealing their true intentions, it becomes challenging for BNPL service providers to identify fraudsters. In this regard, AI-powered identity verification services help increase prevention by deploying multi-layer customer authentication checks.
Secure Digital Onboarding
Once fraudsters bypass identity authentication during onboarding, it becomes tricky to track their purchases and payment trails. In order to prevent illicit actions in the first place, robust IDV solutions offer a series of checks. Real-time presence assurance, document validation, multi-factor authentication, and liveness detection are to name a few. Furthermore, with biometric identity verification systems in place, BNPL companies can cross-check buyers and verify transactions by using facial features. Hence, there will be less room for fraudsters to exploit pay-later services.
Summarizing the Facts
AI-powered identity verification services enable BNPL companies to attain customer trust by offering risk-free financial services. They can minimize illicit actions and stay put with FCA’s guidelines for retaining a competitive edge in the market. Furthermore, BNPL services providers can identify consumers who cannot afford a particular product and will end up creating debt. Hence, automated identity authentication saves additional use of resources while putting sufficient fraud prevention actions in place.