The payment sector is evolving every year and has taken several forms while embracing digitisation. Customers who once have to visit banks physically for payments can now process them online with user-friendly identity verification checks. Similarly, another concept, Buy Now Pay Later (BNPL), is picking pace due to its convenience and reliable financial solutions.
With a recorded value of $141.8 billion in 2021, BNPL companies will grow at 33.3% CAGR by 2026. Despite quick acceptability, these service providers face severe criticism due to debt creation, identity fraud, account takeovers, and weak compliance. Considering this, the Financial Conduct Authority (FCA) came up with stringent authentication of ID obligations for BNPL companies.
The Effects of Fraud Risks on the BNPL Sector’s Growth
Due to increased fraud risks such as payment scams, huge debts, fraudulent transactions, bogus profiles, and account takeovers, BNPL service providers are grasping regulators’ attention. Criminals use these transaction solutions to hide their illicit funds or make a purchase under someone else’s name. Either way, BNPL companies experience legal repercussions along with huge debts.
BNPL companies have become a prime target for criminals as they contain lax security measures to deter suspicious activities. Furthermore, they are on verge of facing strict regulatory scrutiny due to weak compliance protocols. This makes the creation of counterfeit profiles easier. Hence, fraudsters can easily carry out Card-Not-Present (CNP) scams.
- Compliance Risks – A Major Concern for BNPL Companies
Failure to identify suspicious transactions and prevent malicious activities can drive BNPL companies towards non-compliance. Regulatory watchdogs are toughening their stance regarding payment service providers by imposing more stringent legal standards such as suspiciousness detection, background checks, ongoing monitoring, and ID verification.
- Huge Debts Creation
Fraudsters take over legitimate customers’ accounts to make illicit transactions and create huge debts without the cardholder even noticing. As a result, either the consumer clears outstanding payments or BNPL service providers compensate them. Hence, these companies not only face a financial backdrop but can become defaulters.
BNPL service providers with lax validation of identity measures are more likely to experience unforeseen consequences. With loopholes in the security controls, fraudsters easily sweep right in. Therefore, creating adequate digital ID checks is the only way for BNPL companies to stay ahead of criminals and counter their malicious intentions.
Guidelines by the Financial Conduct Authority (FCA) for Fraud Prevention
BNPL companies are facing a severe legal backlash due to insufficient identity verification measures and increasing fraud. In June 2022, the FCA evaluated the performance of unsecured financial firms like buy now pay later service providers and highlighted lax digital ID checks as the cause behind increasing cybercrimes. Considering this, the FCA announced less leniency for BNPL companies regarding consumer protection and regulatory compliance.
The FCA now regulates online payment service providers directly. Hence, companies such as Laybuy, Clearpay, and Klarna are creating robust online global ID verification mechanisms. This way, BNPL companies can abide by legal standards without worrying about fraud risks.
Strengthening BNPL Companies Fraud Prevention Controls with Identity Verification Services
The regulatory bodies are scrutinising BNPL companies to safeguard consumer interest and their profiles along with the integrity of these service providers. In this regard, identity verification services help them not only strengthen their game against fraud risks but also ensure compliance. These robust IDV solutions offer the real-time presence of buyers through liveness detection and selfie-based verification.
Read on to learn more about the benefits of integrating digital ID checks.
Detection and Prevention of Phishing Attacks
Fraudsters are equipped with advanced forgery and identity theft tactics that make identification of their malicious intentions challenging. This is why BNPL companies are facing a surge in phishing attacks where criminals obtain confidential identity information by posing as legitimate payment service providers.
BNPL service providers are integrating digital identity verification for finance to counter the illicit use of account log-ins, PII, and credit/debit card CVVs.
Seamless Customer Onboarding
Digital identity verification solutions automate customer onboarding by integrating AI and ML algorithms. Furthermore, biometric screening increases fraud detection through facial recognition, iris/retina scans, and other biological/behavioural trait analyses. This way, BNPL service providers can cross-authenticate payments and perform ongoing monitoring for additional security.
Concluding Remarks
AI-powered identity verification services have become reliable solutions for BNPL service providers to increase prevention against payment fraud. While customers see pay-later methods as an easy way to purchase goods, high risk of criminal threats can discourage their selection. However, with digital ID checks in place, BNPL companies can not only create trust among consumers, ensure compliance, and increase necessary protection against cyberattacks.
