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Lending Briefing: Fraud and BNPL credit scores

  • Fraud is starting to become a bigger issue in financial services, with both banks and fintechs getting increasingly targeted by fraudsters.
  • The rising popularity of BNPL products is paving the way for new products and services from legacy players - Experian is launching a separate BNPL specific credit score this spring.

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Lending Briefing: Fraud and BNPL credit scores

The pandemic has changed a lot about the way we interact with financial services. If initially the quarantine forced us to stay at home and deal with our finances online or over the phone, now this is becoming a standard process. 

This shift towards the digital definitely has its benefits for us as consumers, but for the ones on the other end, it’s been a mixed bag. Traditional banks haven’t had the easiest journey converting to full-on digital banking, allowing fintechs to thrive by meeting this new demand for online money management and financing. 

But there’s a flip side to this digital-first approach. Fraud is becoming a problem in this new online milieu, only recently starting to be uncovered more adequately. And if fintechs enjoyed a sharp rise in popularity offering easy and seamless sign up processes, this also translated into them being a bigger target for fraudsters. 

Traditionally, when a person would walk into a bank branch to open an account, they would need multiple forms of identification. But online, customer onboarding has turned into a riskier process for banks and consumer fintechs, with fraudsters trying to take advantage of their systems.

And the legacy system wasn’t bulletproof to begin with. Turns out that someone could bypass the system and set up multiple accounts with made-up information, including fake social security numbers – and all these accounts would show up as having good credit scores in a background check. 


Those who figured out all these loopholes could go ahead and get a dozen credit cards, for example.

“I think it was a situation where everyone thought everyone else was doing the job. And actually, no one was doing it. So we realized that there was a real issue impacting financial services – for us it was a crazy moment, how we were the only ones seeing this,” Naftali Harris, CEO of SentiLink, told Tearsheet. 

Banks all across the spectrum are having issues with fraud, not just legacy players – in fact, neobanks and fintechs in particular are facing increased scrutiny over their fraud and risk compliance systems. 

In the US, the fintechs’ fast growing market penetration came hand in hand with a higher risk of fraud. Take PayPal for example – it added 120 million new customers over the past two years, to bring its total user base to 426 million. CFO John Rainey revealed that the company identified 4.5 million accounts that were “illegitimately created”, leading to reports over the issue of fraud in fintech.

Even if that’s still a small proportion of the company’s user base, it did contribute to a wider discussion on fraud in fintech and banking more widely…

Read more

Chart of the week

To delve a bit deeper into the topic of fraud, it’s not just happening in personal finance, but in commercial lines as well. 

Fraud risk for small and medium sized business lending continues to climb, up nearly 7% since 2020, according to LexisNexis’ new study. COVID-19 accounted for 37% of the increase.

The report found that fraud is costing fintechs around 8% of revenues – that’s 2% more than banks and credit unions. 

But the biggest year-on-year rise in fraud has been among smaller banks with a sizeable volume of digital transactions, which experienced more identity fraud. 

And more operations are happening online – 35% of loan applications were submitted on mobile devices in 2021, up from 28% in 2020.

Source: LexisNexis

Quote of the week

Experian found that there were some challenges with how BNPL affected consumer credit ratings, as the product is different from a traditional mortgage, loan or a credit card. 

The population using BNPL services don’t have a tremendous amount of credit history, which has restrained their access to these new flexible payment options. Coupling this with the difference in data that can be used to do credit scoring for BNPL versus on a traditional credit product, there was an opportunity there to give more people access into this new environment. 

So given the rising demand for BNPL products, Experian is going to launch a BNPL specific credit bureau that won't impact the traditional credit scoring for consumers on traditional credit products. 

“That distinction was really important to start to make. Ideally, this would be a separate score for BNPL products specifically. Because of the criteria that condition the repayment methodology that happens in BNPL, there was a need to separate that from the traditional credit scoring. So in the outset, this will be a different score – one that will be useful for BNPL as well as traditional lenders –­ that won't have an overall different and negative impact on consumers’ traditional credit scores. We will keep those separate for the time being as a new standalone Bureau for BNPL. And that's a positive thing for the consumers.” 

– David Britton, VP of strategy, global identity and fraud at Experian. 

What we’re reading 

  • The coming boom in metaverse lending for banks (Forbes)
  • Buy now, pay later firms to refund fees as watchdog cracks down (Yahoo Finance)
  • Klarna reveals that most consumers don’t know how much interest they’re charged when using credit cards (Crowdfund Insider)
  • Unfair lending with AI? Don’t point just at us, fintechs and online lenders say (American Banker)
  • Latin Financial launches first lending podcast in ‘Spanglish’ (deBanked)

What we’re writing 

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