Buy Now, Pay Later Will Fuel Identity Fraud: 2022 Fraud Trend Series

I’ve been developing identity fraud detection technology solutions for almost 35 years. With that background, I feel confident predicting that the identity fraud industry is at an inflection point. I believe 2022 will be a defining year in the identity fraud detection fight, but unfortunately, the “bad guys” have a leg up in technology innovation. 

Over the next two weeks, I’ll be posting a series of blogs with my thoughts on the five most game-changing identity fraud developments in 2022. These are not intended to be profound predictions. Rather, these developments have been building for some time, in numerous ways. In this series of posts, I will examine how the battle against the bad guys is evolving and how the good guys (like you) can fight back.

The Rapid Growth of First-Party Fraud

While there is no consensus in the identity fraud detection industry on how to define first-party fraud (FPF), there’s also no denying its growth across financial services in recent years.

By using their own identity (or a slight variation of it), bad actors take advantage of customer-friendly policies and credit bureau reporting practices. And we believe first-party fraud will continue its rapid growth in 2022, driven by product innovation and increasing customer expectations across digital banking, private industries, and commerce.

Explosive Growth Leads to Exploited Gaps

Consider the explosive growth in the Buy Now, Pay Later (BNPL) industry, and its counterparts in the alternative payment realm. Cornerstone Advisors has estimated that BNPL sales will reach $100 billion in 2021, up from $24 billion in 2020 and $20 billion in 2019.

Many predicted that the 2021 holiday season fueled growth of first-party fraud, and as a result, bad actors perpetrating this type of fraud have a leg up on the BNPL industry because many players do not generally report accounts (tradelines) to the national credit reporting agencies (CRAs). Additionally, BNPL often uses prequalification “soft inquiries” to gather information from the credit reporting agencies when evaluating credit worthiness, which are not reflected on a consumer’s credit report. The lack of inquiry velocity reduces the usefulness of FICO and other credit scores.

Why Now?

The world is undergoing a digital transformation, and the pandemic accelerated the pace. As brick-and-mortar retailers had to lock down their physical locations, ecommerce became the best option for millions of shoppers.

At the same time, a new way to make purchases started to change how shoppers interacted with products across the digital landscape: Buy Now, Pay Later. BNPL providers welcome credit-invisible shoppers, such as Gen Z and millennials, with four-in-one payment plans, zero interest, and often no credit check. With that new credit approach, what was previously outside of budget suddenly became more accessible.

Brands like Klarna, Affirm, and Afterpay became household names overnight. In May 2021, CB Insights reported the global BNPL industry is expected to grow 10-15x its current volume by 2025, topping $1T in annual gross merchandise volume by some estimates. And fraudsters are starting to take note.

Fraud Trend to Watch For: The broad adoption of prequalification by BNPL and other alternative payment industries, coupled with another potential economic downturn resulting from the ongoing COVID pandemic, will lead to further increases in first-party fraud in 2022.

How to Win the Identity Fraud Battle

The writing is on the wall for 2022 to be a defining year for every business fighting against fraud. BNPLs will have an especially fraught fraud fight. If you’re a BNPL provider, The BNPL Providers’ Buyer’s Guide to Identity Verification and Fraud Prediction Solutions can help you find the best technology solution to protect your growth, merchants, and consumers.

If you’re not a BNPL, but are facing similar challenges, please reach out to our team of fraud prevention experts. I know we can help you accept more good customers, reduce your fraud bill, and streamline your risk operations.

This is the first of six fraud trends I’ll be writing about in the coming weeks. Get the full list (plus one bonus prediction) in my new white paper, Six Predictions for Battling Fraud.