Risk around Promotional Codes Top challenge for Risk Managers

Pia fraud risk management (FRM) platform founded by Paytm Labs designed to address high-volume applications for fintechs using machine learning (ML), has published a new report on the impact of fraud on consumer confidence.

The report, with the title Fraud vs. Friction: How the need for speed creates an on-boarding crisis for usersreveals that 71 percent of consumers are less likely to trust a fintech service that has been affected by onboarding fraud.

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 percent) 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 percent) 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.

In accordance with the report’s findings, research from Royal Society for Arts, Manufacturers and Commerce (RSA), found that 48 percent 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 percent 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 percent said they would abandon the registration process if asked to go through more than three identity checks, despite their concerns about fraud.

The report goes on to quote PayPal as a key example of the damage promo 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 percent, the largest single-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 fall, with a 33 percent quarter-on-quarter decline 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,” commented Harinder Takhar, CEO, Paytm Labs. “Adding more friction to the onboarding process in the form of additional controls can be disastrous for businesses at a time when they should be pursuing growth and improving the overall customer experience.

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