Buy now, pay later (BNPL) financing is exploding in popularity. Unfortunately, BNPL fraud is growing alongside this new service, and online merchants are suffering massive financial consequences.
However, by understanding the ins and outs of this emerging type of fraud, you can stay a step ahead of fraudsters and protect your business and customers.
First, it’s important to understand a little about the buy now, pay later service itself. Essentially, banks partner with BNPL providers to underwrite a line of credit so that consumers can immediately make purchases and pay their balance over time. As consumer demand for frictionless experiences grows, so does the popularity of services such as BNPL. In fact, it’s catching on everywhere, from fintechs to traditional financial institutions—even Amazon.
Now, the fraud part: Buy now, pay later fraud is when fraudsters exploit BNPL services and use them to steal money or goods. Buy now, pay later financing allows purchasers to buy items and pay in the future, usually in installments that are spread out over months. That makes BNPL fraud especially difficult to fight because victims and companies often don’t realize a crime has taken place until months after initial purchases.
Buy now, pay later fraud works in a few different ways. In one instance, the fraudster will use an account takeover attack to steal a victim’s BNPL account information. From there, they use the victim’s account to purchase and steal goods from ecommerce companies.
Another common tactic is for the criminal to use synthetic credentials and stolen credit card info to set up a new BNPL account. Then they’ll use the new account to defraud both ecommerce companies and BNPL financers.
Buy now, pay later fraud risk is rising quickly because BNPL services are extremely popular. According to a recent survey by The Ascent, BNPL usage in the United States jumped by 48% in a single year. And this new online service stirs up new opportunities for criminals to steal money.
Still, despite the spike in buy now, pay later fraud, it’s certainly not worth it for companies to shy away from BNPL financing altogether. The relatively new financing option can dramatically cut down sticker shock and make large purchases much more manageable for consumers. It’s one reason BNPL services are expected to inspire more than $1 trillion in annual purchases in the next three years. That means it’s wise for ecommerce businesses to embrace BNPL services but to learn to use them in a safe way.
Most ecommerce businesses’ fraud-prevention tactics simply aren’t working against buy now, pay later fraud, but there are better options out there. Here are a few tips to help merchants protect against this type of fraud:
Adopt a holistic approach to fraud prevention.
Most traditional fraud-prevention strategies are based on a point-by-point technique where your manual reviewers search for fraudulent behavior and shut down accounts as fraud cases pop up. However, this reactive approach doesn’t stop BNPL fraud because, in most cases, the criminal started making fraudulent transactions months in advance. That’s why merchants need to adopt a more holistic fraud-prevention approach.
Merchants can stop advanced types of fraud by protecting against fraud at every stage of the customer’s journey. You can do this by using technology tools that rely on connections to give your reviewers trust scores. These scores examine a purchaser’s full online network, interactions and connections. Ultimately, that means you can see if the person making transactions is trustworthy based on their full online story, not just a single action.
Select a trustworthy BNPL provider.
Merchants can also protect against BNPL fraud risk by vetting their BNPL provider. After all, if the fraudster breaks into a sloppy BNPL service’s account, they still end up using those services to steal from ecommerce companies—and the financial damage lands squarely on merchants. In addition to hitting merchants with stolen purchases, fraud can ruin the ecommerce company’s reputation and cause frustrated customers to flee.
To prevent fraud risk, ecommerce companies should hold BNPL providers to the same high standards they hold their own teams to. That means the financial provider should be adopting a holistic approach to fraud that relies on identifying trust through an interconnected online network.
Leverage Technology
Finally, merchants can fight off BNPL fraud by embracing fraud-prevention technology. And there is now advanced machine learning technology that can simplify work for online security screeners. For instance, Pipl Search taps into years of connection histories and online relationships that span more than 3 billion online users. Manual reviewers can use these tools to identify how trustworthy a person is as soon as they make a transaction. That means security teams can proactively weed out fraudulent accounts before criminals are able to cause any financial damage.
Ecommerce leaders don’t need to sit back and absorb the consequences of fraud. There are new ways for companies to fight back. Read our whitepaper, Trusted Identities: A New Paradigm for Fighting Friendly Fraud, to learn how to use online connections to stop the most advanced types of fraud.