Paytm Labs’ fraud risk management (FRM) platform Pi, which addresses high-volume applications for fintechs using machine learning (ML), recently published a report on the impact of fraud on consumer confidence. The report – “Fraud vs. Friction: How the need for speed is creating a user onboarding crisis”, shows that 71% of consumers are less likely to trust a fintech service impacted by onboarding fraud.
The report showcases the increase in promotional abuse, or “promo fraud”. Threat actors often use this technique to defraud businesses through schemes such as sign-up bonuses, referral rewards, and loyalty discounts.
One of the key findings of the report was that 47% of all respondents considered a fintech allowing promo fraud go unchecked to be lax about security. However, promotional campaigns remain an effective growth strategy, as 66% of respondents said they would choose a fintech platform offering a promotional code over one that didn’t. This highlights an arising problem in the industry where risk managers are finding it difficult to balance growth objectives with security.
The Royal Society for Arts, Manufacturers and Commerce (RSA) research found that 48% of fraud cases come from accounts that have been open for less than one day. This shows how risky it is to have a growth strategy that relies on incentives. Fraud also poses a threat to a company’s existing customers. Pi’s report revealed that 32% of existing customers are “very likely” to stop using a fintech service if there is any fraud.
Even though additional checks are mentioned as a possible solution to onboarding fraud, the report also found that consumers still want frictionless onboarding. Over 70% of consumers said they would not sign-up process if asked to go through more than three identity checks.
According to the report, PayPal was a major victim of account opening and onboarding fraud in the first half of 2022. Over 4.5 million fake accounts were opened following PayPal’s incentivized customer acquisition strategy. This had lead to PayPal’s stock value falling down by 25%.
The “onboarding crisis” is affecting the entire industry, but growth-stage fintechs are feeling it more. Even though the market for fintech is expected to grow to $937 billion by 2030, global funding from investors has been dropping, with a 33% quarter-over-quarter drop in funding recorded in Q2 2022. Each incident of onboarding fraud costs fintechs money, so this is an important issue for investors to consider when deciding whether or not to invest in a company.
“Fintechs are exposed to more risk than ever before, but slowing down isn’t an option,” commented Harinder Takhar, CEO, Paytm Labs. “Adding more friction into the onboarding process in the form of additional checks could be disastrous for companies at a time when they should be pursuing growth and improving the overall customer experience. What’s needed is the ability to handle real-time risk assessments at the same breakneck speeds that the typical modern fintech demands. Ideally, no fintech should have to compromise on its growth objectives in the interests of security – and vice versa.”
The full report providing an in-depth look at how onboarding fraud is making way in the fintech space and the measures fintechs can take to deal with it, can be read here.
