BNPL (Buy Now, Pay Later) is one of the fastest-growing aspects of the Fintech market. Ever since it surged in popularity during the COVID-19 pandemic as a way to make purchasing goods easier, BNPL has certainly made life easier. Today, it’s well on its course to become the most popular alternative payment method in the world. It is used by over 45 million people in the US alone, and it’s expected to reach an estimated market value of $4 trillion by the end of the decade.
What Is The BNPL?
BNPL apps let people access microcredit to buy anything from electronics and equipment to trips and everything in between. It allows them to pay for it in installments after the purchase, which is why it’s called “Buy Now, Pay Later.”
What Is BNPL Fraud?
BNPL fraud is a criminal activity that exploits the system to steal money or data. Most often, professional third-party fraudsters carry it out, but consumers, BNPL companies, or merchants may also participate to gain an advantage.
BNPL fraud can occur in various forms, depending on the perpetrator and the victim. These range from a fraudster posing as a customer to access accounts to a consumer’s straightforward non-payment.
BNPL platforms are more vulnerable to fraud because their systems are designed for speed, increasing conversion rates. As a result, identity authorization and verification are not thorough, making it easier for fraudsters. Similarly, BNPL providers skip full credit checks and only run soft checks to assess creditworthiness. While this streamlines the customer experience, it also allows fraudsters to slip through the cracks.
Moreover, since BNPL purchases are made in installments over several weeks or in a single go at a specified date, this provides a window of opportunity for fraudsters to commit fraud and escape without leaving a trace.
Different Types Of BNPL Fraud Risks
Account Takeover Fraud
Fraudsters can steal usernames and passwords through phishing to access a customer’s account. This information will then be used to place orders to their addresses under the pretense of a genuine customer until the account owner notices.
Synthetic Identity Fraud
Fraudsters set up synthetic identities by harvesting data from online profiles. They use a fake name and birthdate, along with a real Social Security number, to pose as genuine customers and place BNPL orders. These scammers do not intend to make payments, and there is no way to discover their real identities.
New Account Fraud
It is easy to open an account with a BNPL provider, so fraudsters use stolen information to sign up. The KYC (Know Your Customer) and AML (Anti-Money Laundering) checks used by many BNPL providers are not strong enough to detect accounts created with stolen details. Once fraudsters have an account, they place as many orders as they can before being shut down.
Trojan Horse Fraud
In this type of scam, the fraudster creates a BNPL account using fake credentials and then places an order with the merchant. Later, they would use a stolen card as their payment method.
Ways To Prevent BNPL Fraud
Merchants must implement robust safety measures to reduce BNPL fraud and protect both themselves and customers. This begins with a comprehensive risk management strategy that combines detection and prevention techniques.
-
Identity Verification
First, ensure that customers are who they claim to be. At a basic level, this should require them to provide an ID card, proof of address, and even Enhanced Due Diligence checks for customers with a higher risk profile.
-
Authentication Methods
3D Secure verifies the cardholder’s identity while ensuring a smooth customer experience. 3DS uses multi-factor authentication, including usernames, passwords, single sign-on, SMS, and biometrics, to verify identity before authorizing payments.
-
BNPL Transaction Monitoring
Merchants should watch for suspicious patterns in their transaction data that could indicate fraudulent activity. Some red flags to watch out for include logins from multiple IP addresses and devices, multiple payment attempts using the same card, or attempts to use details reported as stolen.
-
Verification Of Address
This ensures the address customers provide during payment is genuine. The card network or bank cross-references details with authoritative sources in an Address Verification Service (AVS) check to verify the address. They then inform the merchant whether the address matches the one on file.
-
Integrate Machine Learning
Merchants must utilize AI and machine learning tools to identify fraud. Since these tools can review transaction data in seconds, they can identify and prevent fraudulent activity better than human agents. Moreover, these tools are constantly improving and becoming more accurate, making them a strong line of defense against online fraudsters.
Final Thoughts
Naturally, wherever there is money to be made, criminals follow. BNPL fraud is on the rise, and fraudsters have devised deceptive tactics to exploit consumers and businesses. To make sure that you don’t fall prey to these scams, it’s important to have a thorough understanding of how BNPL works.
