Fraud report reveals customer onboarding crisis for fintechs

A new report has revealed that around 71% of consumers are less likely to trust a fintech service that has been affected by onboarding fraud.

Fraud risk management platform Pi has published a new report, “Fraud vs. Friction: How the need for speed is making a user onboarding crisis”, about the impact of fraud on consumer trust.

The report refers to onboarding fraud as a growing epidemic, and highlights the increase in promotional abuse or “promo fraud”, where threat actors – often on a large scale – defraud businesses by abusing promotional campaigns such as sign-up bonuses, referral rewards or loyalty discounts.

One of the report’s key findings was that nearly half (47%) of all respondents considered a fintech that allowed ad fraud to go unchecked to be lax on security. Nevertheless, promotional campaigns remain an effective growth strategy, with more than two-thirds (66%) of respondents saying they would choose a fintech platform that offered a promotional code over one that did not. This highlights a growing concern in the industry, where risk managers are finding it increasingly difficult to balance growth targets with security.

Consistent with the report’s findings, research by the Royal Society for Arts, Manufacturers and Commerce (RSA) found that 48% of fraud cases originate from accounts that are less than one day old, underscoring the extent of the risk now associated with incentivized growth strategies. Fraud risk also poses a threat to a company’s existing customer base. Pi’s report revealed that 32% of existing customers are “very likely” to stop using a fintech service and close their accounts after any incident of fraud.

Additional checks are cited as a potential solution to boarding fraud, but the report also found that frictionless boarding remained a top priority for consumers. More than 70% said they would abandon the registration process if asked to go through more than three identity checks, despite concerns about fraud.

The report goes on to cite PayPal as a key example of the damage that ad fraud can do. In the first half of 2022, the payments giant was a major victim of account opening and onboarding fraud. More than 4.5 million fake accounts were opened following the company’s incentivized customer acquisition strategy, causing PayPal’s stock value to drop 25%, the biggest one-day drop ever.

While the “onboarding crisis” affects the industry at large, it is likely to be felt more acutely by growth-stage fintechs. Despite projections that the fintech market will grow to a value of $937 billion by 2030, global fintech funding from investors continues to decline, with a 33% quarter-over-quarter drop in funding recorded in Q2 2022. Each incident of onboarding fraud is a cost that fintechs themselves must bear, making fraud risk a critical consideration for potential investors.

“Fintechs are exposed to more risk than ever before, but slowing down is not an option,” said Harinder Takhar, CEO, Paytm Labs.

“Adding more friction to the onboarding process in the form of additional controls can be disastrous for companies at a time when they should be pursuing growth and improving the overall customer experience,” he says.

“What is needed is the ability to handle real-time risk assessments at the same breakneck speeds that the typical modern fintech requires. Ideally, no fintech should have to compromise its growth goals for the sake of security – and vice versa.”