Buy Now Pay Later Fraud: Risks & Prevention

Buy Now Pay Later Fraud: Risks & Prevention

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August 13, 2021 by Jimmy Fong

One of the hottest areas within 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, set to be the biggest-ever buyout in Australian history.

But this new business opportunity is not without risks, especially when it comets fraud. Let’s break it down in detail.

What is Buy Now Pay Later?

Buy Now Pay Later is a payment method that allows customers to spread the cost of an item of 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 for higher barrier consumer goods – such as designer clothes or jewelry – especially for millennials. 

How Does Buy Now Pay Later Work?

Buy Now Pay Later companies perform a credit check on customers who use them and cover the payment to the business selling the goods or services. The customers then have to pay back that payment in full overtime.

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

You can use BNPL providers at online stores such as:

  • Adidas
  • AirBnb
  • Amazon
  • Expedia
  • H&M
  • InstaCard
  • GameStop
  • Sephora
  • Urban Outfitters

What Are the Downsides of Using Buy Now Pay Later?

While a rise in online shopping during the COVID-19 pandemic has led to an increase of BNPL usage, not everyone recommends relying on that patient 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 for 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 a UK based report revealing 30% used the service to pay for purchases they can’t otherwise afford. 

Some argue this issue falls on the merchants, opting for profitability over consumer care, whereas the harshest critics believe that BNPL are simply a reincarnation of payday lenders as many of these loans typically don’t involve a hard credit inquiry. 

What Are the Risks Involved With Buy Now Pay Later?

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 reputation may be damaged. Chargebacks are always an issue with compromised accounts and, whilst the liability might fall on the BNPL, your reputation as a reliable merchant could still take a hit.
  • Compliance issues may arise. Fraudsters use synthetic identities to pass through both fraud, KYC and credit checks with zero intention of paying back the purchase.
BNPL flowchart
  • Account takeover attacks (ATO) can also take place on such platforms with fraudsters using bots to exploit weak passwords or purchase stolen credentials from pastebins on the darkweb. 
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Example of Buy Now Pay Later Fraud

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

How to Prevent Buy Now Pay Later Fraud?

Buy Now Pay Later (BNPL) fraud is all about removing friction but that’s why you need to put in work in the background. 

As with any online store, it should be in merchants 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 users 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 specialised in one scam / technique over others and the varying access to separate components, i.e. money mules, access to fake / stolen IDs.

With flexible rule suggestions supported by advanced machine learning, you can analyse a range of tripwires such as unusual purchasing behavior, new device logins and shipping address inconsistencies.

Being proactive with your fraud systems, layering your defences 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 check and uses a stolen credit card number. Account takeover is also rampant, when fraudsters acquire login details of other BNPL users to purchase items.

Should I allow BNPL in my store?

The risks for the store owners 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 when accepting standard payment methods.

Who is liable for chargeback fraud 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 used for this article:

  1. Square – Square, Inc. Announces Plans to Acquire Afterpay
  2. Wall Street Journal – one in five millennials used the service in 2020
  3. Finder – 30% used BNPL to pay for purchases they can’t otherwise afford
  4. BBC – Klarna Surprise Bill Story
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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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