Buy Now Pay Later Fraud: Risks & Prevention

One of the hottest areas in fintech is undoubtedly the buy now pay later (BNPL) sector, especially with the news of Square acquiring Afterpay in an all-stock US$29bn deal breaking in August of 2021, set to be the biggest-ever buyout in Australian history.

But this new business opportunity is not without risks, especially when it comes to fraud. To help you protect yourself, today, we’ll break down the buy now pay later type of fraud in detail.

What Is Buy Now Pay Later?

Buy now pay later (BNPL) is a payment method that allows customers to spread the cost of an item or product over multiple payments.

It is a relatively new concept that provides “instant credit” at the point of sale, enabling the customer to split their payment across installments without the typical fees or complexity of a traditional credit card purchase. The method is particularly appealing to millennials and Gen Z interested in top dollar consumer goods – such as designer clothes or jewelry. 

How Does Buy Now Pay Later Work?

BNPL companies perform a credit check on customers who want to use them, and cover the payment to the business selling the goods or services. The customer then has to pay this back to the BNPL provider in full, over time.

If a payment is missed by the customer, they have to pay extra fees. If the customer disappears or defaults on the loan, the BNPL provider absorbs the damages.

You can use BNPL providers at online stores such as:

  • Adidas online shop
  • Airbnb
  • Amazon
  • Expedia
  • H&M
  • Instacart
  • GameStop
  • Sephora
  • Urban Outfitters

What Are the Downsides of Using Buy Now Pay Later Schemes?

While a rise in online shopping during the COVID-19 pandemic has led to an increase of BNPL usage, not everyone recommends relying on this method.

A report by the Australian Securities and Investment Commission (ASIC), for instance, said that one in five users are being hit with late payment fees.

There are also concerns with regards to the source of revenue of many of these BNPL companies and the due diligence checks they run on customers.

Offer of interest-free installments with no additional fees (if paid on time) can lead to overspending problems, which in turn can heavily impact a person’s credit score, with one source reporting that 30% of customers used the service to pay for purchases they couldn’t otherwise afford. 

Some argue the blame should fall on the merchants opting for profitability over consumer care, whereas the harshest critics believe that BNPL operators are simply a new form of payday lender, as many of these loans typically don’t involve a hard credit inquiry. 

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What Are the Risks Involved With Buy Now Pay Later Fraud?

Unfortunately, BNPL payment schemes are risky for everyone involved.

  • Victims of identity fraud can be hit with charges from BNPL firms for products they have never bought. 
  • The merchant’s reputation may be damaged. Chargebacks are always an issue with compromised accounts and, while the liability might fall on the BNPL, your reputation as a reliable merchant could still take a hit.
  • Compliance issues may arise. Synthetic identity frauds can happen, it is known that fraudsters use fake identities to pass through fraud, KYC and credit checks with zero intention of paying back the purchase.
  • Account takeover attacks (ATO) can also take place on such platforms, with fraudsters using bots to exploit weak passwords, or purchasing stolen credentials from pastebins on the dark web. 

Buy Now Pay Later Fraud Example

The most common type of fraud encountered with BNPL schemes will relate to chargeback fees and stolen credit card payments. Here’s how it works:

  1. A fraudster goes to an online store and chooses the option to pay via BNPL.
  2. They create a BNPL profile using a synthetic ID, and enter stolen credit card details.
  3. The BNPL company takes care of the payment and the item is shipped.
  4. The fraudster pays back a portion of the BNPL payment using the stolen card.
  5. The original cardholder notices a suspicious payment and initiates a chargeback.
  6. The BNPL company is hit with a chargeback fee.

As we have seen, despite the BNPL operator taking on the chargeback costs, this can still be detrimental to the merchant’s reputation, compliance, and inventory.

buy now pay later fraud flowchart. how do fraudsters commit BNPL fraud?

How to Prevent Buy Now Pay Later Fraud

When optimizing your protection against buy now pay later (BNPL) fraud, you are well advised to be mindful of friction. That’s why it makes sense to put in the work in the background. 

As with any online store, it works in the merchant’s interest to build a complete customer profile before any transactions are made. 

Using a real-time data enrichment solution, merchants are able to trace phone, email and IP data points to get a clearer picture of who your shoppers are.

Automated anti-fraud tools can be useful in flagging obvious fraudulent orders. However, remain aware of the risk of false positives, which can ultimately lead to a user taking their custom elsewhere.

Merchants operating in one market have to keep in mind that fraud knowledge is mostly regional. Different countries’ cybercriminals are more specialized in one scam/technique over others and varying access to separate components such as money mules or fake and stolen IDs.

With flexible rule suggestions supported by advanced machine learning, you can analyze a range of tripwires such as unusual purchasing behavior, new device logins, and shipping address inconsistencies, to get a clearer picture of your local, topical landscape.

Being proactive with your fraud systems, layering your defenses with the most suitable products, and keeping consistent communication with your customers will help curb BNPL fraud.

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Frequently Asked Questions: Buy Now Pay Later

What Is the Fraud Risk with BNPL Companies?

BNPL companies can be victims of chargeback fraud, where the user passes a KYC verification check and uses a stolen credit card number. Account takeover is also rampant, referring to when fraudsters acquire the login details of legitimate BNPL users and use them to purchase items.

Should I Allow BNPL in My Store?

The risks of BNPL for merchants are relatively low. On the plus side, it allows you to accept more payments and to build trust with customers. However, the fees may be higher than those relating to standard payment methods.

Who Is Liable for Chargebacks with BNPL Schemes?

In case of a fraudulent transaction, it is the BNPL company who will absorb the risk and the chargeback fee – not the store owner.

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Learn more about:

Browser Fingerprinting | Device Fingerprinting | Fraud Detection API | Machine Learning Fraud

Sources of data presented in this article:

  1. Square: Square, Inc. Announces Plans to Acquire Afterpay
  2. Wall Street Journal: Macy’s, Gap, Neiman Marcus Will Let You Buy Now, Pay Later
  3. Finder: Buy now pay later: 1 in 5 Australians end up paying fees
  4. BBC: Klarna: ‘I got a £30 bill – but I didn’t buy anything’

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Author avatar
Jimmy Fong

Jimmy is the CCO of SEON and brings his in-depth experience of fraud-fighting to assist fraud teams everywhere.

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