Buy now, pay later (BNPL) is a shopping trend that’s skyrocketing in popularity. Data from Juniper Research shows that BNPL platforms will reach $437 billion globally in 2027, rising from $112 billion in 2022. Fueled by the rising cost of living and inflation, more and more shoppers are looking for solutions that allow them to pay in installments. Buy now pay later services are also often easier to use and interest-free, making them a great alternative to credit cards.
While it may provide a convenient way to shop, the rise in BNPL has also created a new opportunity for fraud. Buy now pay later fraud has gone up an estimated 54% year-over-year. When buy now pay later fraud occurs, it can have serious implications for merchants and their customers. Here’s what to know about BNPL fraud and how to protect your business and customers from this new type of attack.
What is buy now, pay later (BNPL)?
Buy now, pay later is a way for a customer to make a purchase and pay for the item over time, usually in interest-free or low-interest installments. Because they are low- or no-interest, this makes BNPL a popular option for those with less spending power or shoppers who need payment flexibility.
For retailers, BNPL offers a way to capture more sales, decrease cart abandonment, and improve conversion rates. “BNPL can significantly broaden potential buyers for a retail channel, enhance the customer experience, and build loyalty,” wrote Retail Dive.
Buy now, pay later is a new branding for an old concept. BNPL schemes are not dissimilar to traditional installment plans that are commonly offered for higher-ticket purchases. Today, however, fintech companies have expanded access to BNPL, allowing more customers to access short-term low-interest credit and apply it to a broader range of purchases.
What is buy now pay later fraud?
Companies like Klarna, Affirm, and Afterpay allow merchants to offer BNPL options to their customers using four typical BNPL operating models. Accordingly, each BNPL distribution type comes with its own risk for fraud.
Broadly, BNPL fraud is a type of financial fraud that involves the unauthorized use of a buy now, pay later account to make purchases. Three common BNPL fraud tactics that impact consumers include:
Synthetic identity fraud
Synthetic identity fraud is when fraudsters create false identities by combining stolen identities with fictitious identifying information and purchasing items using BNPL options. Then, they default on their payments either immediately or after the first payment.
Account takeover fraud
In account takeover fraud, fraudsters take control of a consumer’s digital account using stolen information and make purchases with BNPL before they vanish.
Chargeback fraud
Some BNPL agreements require an upfront payment as part of the transaction. If a fraudster used stolen information to make the transaction, the true owner may realize that their information was used and demand a refund.
Merchants are also targeted by buy now, pay later fraud. Merchant-side BNPL fraud can occur in the following ways:
Triangulation fraud
A customer looks at multiple sellers for an item on an online marketplace like Amazon. After comparing options, they place an order with a seemingly lower-cost seller. Unknowingly, they’ve purchased an item from a fraudulent seller. The fraudster then places an order with a legitimate merchant using the customer’s credentials and uses BNPL to pay for the order. The fraudster either intercepts the shipment or allows it to be delivered to the customer, and cancels the BNPL payment or defaults on the remaining payments, leaving the legitimate merchant with the loss. The customer’s information is retained by the fraudster and is often reused in other fraud schemes.
Return fraud
In return fraud, the fraudster purchases goods using BNPL and then returns the goods to the merchant, claiming that they are defective or not as described. The merchant then refunds the fraudster’s BNPL payment, even though the goods are not actually defective and do match the seller’s description.
Ultimately, merchants are often left liable for BNPL fraud, even in cases in which the consumer is the target. “BNPL providers have full liability for fraud disputes. This gives them the incentive to keep card not present fraud rates low,” wrote Ravelin. “Many merchants don’t fraud screen their BNPL transactions, so aren’t aware of their BNPL fraud levels at all.”
Not only are these fraud attacks expensive, but they can also damage the merchant’s reputation with consumers. Most shoppers don’t differentiate between the BNPL provider (such as Klarna) and the retailer. They simply hold the merchant accountable for any fraud attempts.
The rise of BNPL fraud
The financial (and hidden) costs of BNPL fraud are high—and rising.
Buy now, pay later fraud is often successful because there are so many opportunities to intercept customer and payment data. “Fraud on BNPL platforms differs from general e-commerce fraud because of the unique way BNPL is structured. With payments spread across four (or more) transactions, fraud actors have an expanded ‘attack surface,’ giving them more opportunities for infiltration,” explains Fortune.
Part of the trouble in mitigating the risk of BNPL fraud is that there is a lack of consumer protection compared with traditional credit card companies. There’s also limited oversight of data harvesting and monetizing customer data, reports CNBC. This lack of regulation and monitoring on a federal level is currently being addressed by the U.S. Consumer Financial Protection Bureau.
In the meantime, businesses must take their own steps to stem the rise of BNPL fraud. Most experts believe this starts with the right technology and information sharing.
Preventing BNPL fraud with Fraud.net
Buy now, pay later fraud is pervasive because it is so difficult to spot. The first step merchants can take is to implement a tool like Fraud.net’s Application AI to combat synthetic identity fraud in BNPL transactions. Application AI collates your existing data and supplements it with relevant, external BNPL data to spot fraudulent behavior based on prior transactions. It analyzes vital identity factors during account creation, cross-verifies critical identity data, and flags potential high-risk behavior rapidly enough that the customer’s experience remains seamless.
Application AI can help improve monitoring for BNPL fraud as well as reduce the risk of synthetic identity fraud. With Fraud.net’s Transaction AI, these tools form a comprehensive approach to protecting your business and customer data. Fraud.net’s platform can:
- Analyze velocity and linkage to ensure the transaction is associated with a genuine customer
- Check for previous bad outcomes on BNPL transactions’ billing addresses
- Generate insights on the number of times an item has been purchased by an IP address or if multiple products were ordered to different locations by a single IP address (an excellent indicator of fraud)
- Perform dynamic device fingerprinting to capture the device ID used for BNPL applications, helping detect bots and other fraudulent activity
[Read more: eBook: Effectively Prevent Buy Now Pay Later Fraud]
Learn more about how Fraud.net can help your business reduce the risk of BNPL fraud without sacrificing the customer experience. Watch this 15-minute free video to learn more about BNPL fraud, the risks associated with every stage of the customer journey, and how Fraud.net’s solution works.