Buy now pay later (BNPL) concept has been so common especially in recent years. Companies including but not limited to online retailers have started to offer this option to their customers and the clients started to benefit from this payment option more often. Important retailers such as Sephora, H&M, Adidas, and Amazon are just a few of the brands that offer BNPL to their buyers.
So, what does buy now pay later mean? Thanks to buy now pay later option, clients can buy goods or services on credit at a moment, and they can pay for it on a later date. Buy now pay later offer is usually provided when there is a big purchase in place. With buy now pay later, your payments are divided into equivalent, interest-free instalments over time and you need to pay it back usually in a couple of months.
The Reason Behind the Increasing Demand for BNPL
Buy now pay later trend is in an accelerate growth stage. It seems that this trend is among the numerous COVID-19 remarks as well and closely accompanies the increasing e-commerce habits of consumers. According to a CNBC article published in September 2021 the market size of BNPL was $100 billion and by 2026 this number is expected to hit almost $700 billion.
With a great shift in all of our lives, our consuming habits took a new turn and a new era started for the world: rise of the digital. While digitalisation was already climbing to the top, COVID-19 had an amazing booming effect on its pace. For e-commerce lovers, BNPL is performing a complementary mission and simplify the decision process by giving trust to the customers.
When it comes to the rise of the BNPL, Swedish company Klarna, which is one of the biggest BNPL service providers globally, had an undeniable effect. Statistics show that Sweden has the biggest market share for BNPL and this numbers seem to be related to Klarna. The company has almost 150 million active users globally according to latest numbers.
What is Buy Now Pay Later (BNPL) Fraud?
Although buy now pay later is a desirable option both for merchants and consumers, it has some disadvantages as well. As fraudsters are finding new ways day by day, BNPL has also been open to fraud. Normal credit regulation rules and regulations don’t apply for BNPL and scammers use this to their benefits. Moreover, many firms which offer buy now pay later option only ask for simple information from the customer such as name, e-mail address, etc. This increases the probability of fraud. Because BNPL
- is becoming more and more common among customers,
- is unregulated in many countries,
- and requires simple information from users,
fraudsters find BNPL tempting.
6 Types of BNPL Fraud Risks to Watch Out for
- Account Takeovers (ATOs):
Account takeover fraud is the most common BNPL fraud type. If a scammer can have the personal info such as the login info of a real customer’s BNPL provider account, he/she can use this info to log into e-commerce sites and buys goods or services from that customer’s account. Since billing isn’t done instantly, it might take time for the client to realize what has happened. Customers tend to blame retailers so retailers should be fully prepared for this kind of fraud to not lose their reputation and customers.
- Never-Pays Fraud:
Scammers might steal identities to create account or hack customers’ account. Afterwards, they can make massive purchases and they don’t pay it back. Fraudsters may steal cards and access to buy now pay later services with the information written in those cards. Never-pays fraud is related to other BNPL fraud types such as new account abuse, account takeovers and synthetic ID fraud.
- Synthetic ID Fraud:
Synthetic ID fraud is a common financial crime which bad actors committed. In synthetic identity fraud, bad actors use true and fake personal information to generate a new ID. They might use a real Social Security Number with other fake information and create some identities. It becomes harder to detect and prevent fraud when scammers use this method.
- Family Fraud:
Especially elderly people and parents of little children are exposed to this kind of fraud. A close relative or a friend of the person commits the fraud and it’s hard to detect the fraud. The person who commits the fraud needs to be someone the victim knows. If the victim realizes the incident, he/she can intervene and take his/her money back. Family fraud isn’t a new term, and it sometimes may occur unintentionally.
- New Account Abuse:
Opening a buy now pay later account is too easy. Individuals can submit what’s written in a document such as driver’s licence and open an account quickly. However, fraudsters might steal that personal information and use it to their interest. Know Your Customer (KYC) procedures of many BNPL providers aren’t adequate and fraudsters are always ready to commit fraud.
- Trojan Horse Fraud:
This last fraud type is a trending method especially in 2022. Fraudsters invest a little more effort and time into this scam. Just like another customer, they sign up to a merchant’s website with a BNPL account. After spending some time as a legit customer, they change their selected payment method to a stolen credit card. Since they have a good record until then and they seem like a real customer, their payments get passed by the system easily.
Often the BNPL provider covers the chargeback fees instead of the merchants. Hence, the merchants are usually more prone to take fraud risks for BNPL payments instead of false-positive risks and this security gaps provide fraudsters with a leverage.
How to Fight BNPL Fraud?
Whichever form it comes in, fraud is fraud. Although there should be a sector and user specific approach for the best results, fundamentally the methods used to fight fraud and the precautions you should take are very similar.
- Get the Support of a Powerful Anti-Fraud Solution
Fighting fraud by only using human shields will give the fraudsters who use every chance to make their scam work a huge advantage. Alongside your risk team, you should also have another trusted ally: a powerful anti-fraud solution. All the efficient solutions make use of artificial intelligence as well. So, you can get quicker and more accurate results as well as automizing your risk orchestration processes.
- Reinforce and Invest in Your KYC Procedures
When it comes to e-commerce business, the more you know your customers better, the less you will lose. Working on your KYC procedures or investing in advancing them is a good idea to prevent future damage. However, don’t forget to risk of user friction that will displease your legit customers.
- Use 2-Factor Authentication for Better Verification
There’s not much debate on the benefits of two-factor user authentication both for the user and the merchandiser. It’s a very easy but also an efficient way of enhancing the security level and decreasing the risk of fraudulent activity. Two-factor authentication is an extra layer of protection along with being an application that gives your legit customers trust. Hence, it contributes to your brand image too by helping you build stronger relationships with your customers.
To sum up...
Fraud cases might cause reputation and trust loss among customers. These lead clients to stop doing business with that firm. Businesses which have buy now pay later options for their customers need to be specifically careful about the fraudulent activities.
The burden is not only on the merchant in the case of BNPL but also on the provider firm as well. Both retailers and BNPL companies should have a more proactive approach instead of a reactive one. Both parties have to pay attention to the safety of their customers as well as their own. After what’s done is done, it may be too late to take precautions.