How Buy Now Pay Later Poses Fraud Risks

Buy Now, Pay Later or BNPL offers have proliferated in recent years, reflecting a shift in consumer credit trends and opening new doors for businesses around the world to boost their revenue throughout the year. The process is intended to lower the barrier of entry to allow anyone to open a limited line of credit for a single transaction. Buy Now, Pay Later options can provide simpler and more advantageous terms to shoppers than traditional credit alternatives, including low-to-no interest, no need for a credit check, plus smaller payments than a full-sum purchase would require. While this can bring about improvements in sales numbers, many companies are adopting this approach without fully understanding the fraud risks it poses such as:

Buy Now, Pay Later or BNPL offers have proliferated in recent years, reflecting a shift in consumer credit trends and opening new doors for businesses around the world to boost their revenue throughout the year. The process is intended to lower the barrier of entry to allow anyone to open a limited line of credit for a single transaction.

Buy Now, Pay Later options can provide simpler and more advantageous terms to shoppers than traditional credit alternatives, including low-to-no interest, no need for a credit check, plus smaller payments than a full-sum purchase would require. 

While this can bring about improvements in sales numbers, many companies are adopting this approach without fully understanding the fraud risks it poses such as: 

Synthetic Identity Fraud

A synthetic identity makes it possible for criminals to fool companies so that they do not really know who they have extended credit to.  A synthetic identity is typically anchored on a real piece of data from a person who does not have a credit file.  This makes them tricky to assess and impossible to use in the event that expected payments are never made.

Stolen Identity Fraud

In this case, fraudsters simply apply for BNPL credit using stolen identity documents, leaving their victims to blame for missed payments after a purchase. This is especially effective online, where no physical contact needs to be made to complete a transaction.

Chargebacks

A chargeback is when a customer disputes a payment made through credit. Depending on the financial organizations involved, different terms may apply and the outcomes of such disputes are not always predictable. However, a successful chargeback normally results in the customer getting the charge reversed on their bill while, in the case of a fraudulent chargeback, they get to keep the product that was purchased. For the merchant, there may be a fee that they need to pay and the risk of being barred from transacting at all if there are too many chargebacks in too short a period of time.

Risk to Fintech

When customers make a BNPL purchase, they often do so through a Fintech provider. Klarna and Affirm are two examples that provide merchants with a full payment upfront while allowing customers to break payments up into smaller installments. These providers are typically the service provider and the provider of financing. As a result, they shoulder an even bigger risk. 

Never Pay Fraud

Never Pay fraud is the likely result of many fraudulent BNPL transactions. When fraudsters take advantage of stolen identity documents and pilfered payment cards, they can then sign up to place purchases through BNPL providers without ever paying for any of them. 

Purchases can often be made on any hacked accounts that individuals already hold with these providers as well, requiring little more than their access credentials to engage in spending up to a predetermined amount at many different online stores.

How to Stop BNPL Fraud

Buy Now, Pay Later sales tactics may be risky for providers, but they appear to be here to stay. BNPL options have seen tremendous growth in adoption in recent years and are expected to balloon to 4.5% of North America’s e-commerce payments by 2024.

Regardless of the risks, providers are likely to continue offering such services, and merchants, benefitting from the ramp-up in sales, are expected to adopt them at a steady clip as well. Instead of standing against the rising trend, organizations can make use of the right resources to mitigate the risks they may pose.

Identity Verification

Identity verification is essential for combatting the kind of fraud risks that BNPL options invite. The key is to ensure that the information customers provide to your business is legitimate. This means using validation checking technology that determines if the applicant is who they claim to be.

Intellicheck provides an easy-to-use service that manages document submission and facial biometrics through a mobile app and quickly delivers results.  Intellicheck’s unique technology is 99.9% accurate versus sub-60% accuracy from other identity validation providers.

Risk Score

Understanding that the ID is real and that the ID presented belongs to the person who presented it is not the end of the story. For instance, knowing that does not tell you if they have committed fraud in the past, have a criminal background, or are acting on behalf of others (e.g. muling). These areas are important to understand before extending credit. That is why it is also important to analyze elements such as the user’s IP location, device reputation, phone number reputation and even looking on the dark web for compromised credentials.
 

Uplevel Your Fight Against Fraud

Buy Now, Pay Later trends are looking up, not down. It has already proven to be successful and profitable for many companies and more are likely to follow. This makes partnering with a company capable of providing top-of-the-line protection a mission-critical goal moving forward. Intellicheck is that company.

Our platform provides the kind of highly accurate and fast identity validation performance that law enforcement agencies and top ten financial institutions depend on every day. By partnering with Intellicheck, you can expect sub-second document verification results with 99.9% accuracy. 

Integrate Intellicheck with your existing system at any level you prefer or make use of our online portal to have a powerful security solution up and running instantly.