BNPL Fraud: Understanding the Risks and Consequences

BNPL fraud is a growing concern, with 71% of merchants experiencing at least one BNPL-related chargeback in the past year.

The lack of stringent regulations in the BNPL industry makes it vulnerable to scams and malicious activities.

As a result, consumers are increasingly falling victim to BNPL scams, with 45% of consumers reporting being targeted by scammers using BNPL services.

The consequences of BNPL fraud can be severe, with merchants losing an average of $1,500 per incident.

BNPL, or Buy Now Pay Later, is a type of short-term financing that's been around for decades in different forms. It allows consumers to split up a specific purchase into installments rather than paying the full total upfront.

Consumers choose BNPL for various reasons, with managing spending being the main reason cited by 34% of consumers in an Experian survey. Convenience and avoiding interest payments are also top reasons, with 31% and 23% of consumers choosing BNPL for these reasons respectively.

Participating retailers typically offer BNPL at point-of-sale, making it easy for customers to opt-in and get instantly approved. The customer then makes a down payment and pays off the installments from their preferred account.

BNPL, or Buy Now Pay Later, has been around for decades in different forms. It's a type of short-term financing that lets consumers split up a purchase into installments.

Consumers love BNPL because it offers the option to pay in installments rather than paying the full total upfront. This convenience is a major draw.

The modern form of BNPL typically offers four installments, with the first payment at the time of purchase. This makes it easy for customers to get started.

According to an Experian survey, consumers cited managing spending as one of the main reasons for choosing BNPL. They also value the convenience and avoiding interest payments.

Participating retailers generally offer BNPL at point-of-sale, making it easy for customers to opt-in and get instantly approved. This seamless experience is a big part of BNPL's appeal.

BNPL offers the option to split up a purchase into installments, allowing you to pay over time instead of upfront. This makes it a convenient choice for many consumers.

Consumers choose BNPL for various reasons, including managing spending, avoiding interest payments, and enjoying 0% APR. According to an Experian survey, 34% of consumers cited managing spending as a main reason for choosing BNPL.

Participating retailers typically offer BNPL at point-of-sale, making it easy for customers to opt-in and get instantly approved. The customer then makes a down payment and pays off the installments from their preferred account.

The modern form of BNPL usually offers four installments, with the first payment at the time of purchase. This allows customers to spread out the cost of their purchase over several weeks.

Here are the key aspects of BNPL that make it vulnerable to fraud:

BNPL, or Buy Now, Pay Later, is a type of short-term financing that's been around for decades in different forms. It allows consumers to split up a specific purchase into installments rather than paying the full total upfront.

The modern form of BNPL typically offers four installments, with the first payment at the time of purchase, and 0% APR with no hidden fees. This makes it an attractive option for consumers who want to manage their spending, prioritize convenience, or avoid interest payments.

Consumers have cited managing spending (34%), convenience (31%), and avoiding interest payments (23%) as main reasons for choosing BNPL. This suggests that BNPL is a popular choice for those who want to make purchases without breaking the bank.

BNPL doesn't yet have the robust regulations and standards in place that help to protect more established methods, which contributes to a greater BNPL fraud risk.

BNPL offers near-instant approval with looser lending restrictions, making it a convenient option for consumers.

For customers, the benefits of buy now pay later are clear, with low- or no-interest rates and no impact on their credit rating.

Immediate access to more expensive items is a major draw, with an estimated 40% of Americans planning to use BNPL during the 2022 holiday season.

However, this convenience can lead to overspending, with consumers committing to purchases they can't readily afford.

The app doesn't check whether consumers have sufficient finances to afford the payment plan, and it doesn't stop buyers from overspending without realizing it.

Merchants need to determine if adding BNPL will be profitable for their business, and if they can do so safely without increasing their risk of fraud and abuse.

There are equal numbers of potential benefits and drawbacks for merchants to consider, making BNPL a complex option for retailers.

Fraudsters are becoming more aware of how internal rules systems work, making it harder to identify potential fraud attacks using only internal data. This is why organizations need to improve their risk assessment process with holistic, live data sources.

Rule-based risk assessment involves using insights from historical data to identify potential fraud attacks, but it's not enough to rely solely on internal data. Fraudsters can target a company from other countries where an unfamiliar scam technique is the norm.

To stay competitive and profitable, businesses need to remain vigilant against potential BNPL fraud threats. This requires having a comprehensive view of consumer payments, including the number of outstanding BNPL loans, total BNPL loan amounts, and BNPL payment status.

Organizations can use predictive credit, identity verification, and fraud prevention tools to minimize the risks associated with BNPL. These tools can detect and apply the relevant treatment to different types of fraud, helping businesses make confident lending and fraud prevention decisions.

A high fraud score can automatically block a registration, preventing fraudsters from accessing a BNPL customer's site. This is one way that SEON customers counter BNPL fraud risks.

Buy Now Pay Later (BNPL) fraud is a growing concern, and it's essential to understand the types of risks and scams involved.

Fraudsters see BNPL companies as a lucrative target due to lax checkout and identity verification processes. Experian predicts an uptick in three primary risks: identity theft, first-party fraud, and synthetic identity fraud.

Identity theft is a significant risk, where victims can be hit with charges from BNPL providers for products they have never purchased. First-party and synthetic identity risks emerge as a shopper's buying power grows, and the temptation to abandon repayment increases.

Never-pays fraud is a consequence of other fraud risks, particularly new account abuse, ATOs, and synthetic identity fraud. Fraudsters create accounts with stolen identities or hack someone else's to make huge purchases without paying back.

Account takeover fraud (ATO) is another type of risk, where fraudsters take over existing accounts, circumventing identity verification. This type of fraud is particularly challenging to detect, but organizations can monitor account logins for new devices or IP addresses and examine all account changes.

The risks of BNPL are real, and it's crucial for businesses to be aware of these types of fraud to prevent them. By understanding the common types of risks and scams, organizations can take proactive steps to mitigate these threats and protect their customers.

Preventing BNPL fraud requires a multi-faceted approach. Automate 95% of fraud checks to free up time and resources for manual reviews. This can be achieved through technologies such as real-time payment transaction monitoring, rule-based assessment, and real-time digital footprint analysis.

By using these technologies, businesses can reduce fraudulent registrations by 90% and accelerate manual reviews by 90%. This can be seen in the success of Soft2Bet, which significantly enhanced its fraud prevention efficiency with SEON.

To further mitigate BNPL risks, businesses can use predictive credit, identity verification, and fraud prevention tools. These tools can provide a comprehensive view of consumer payments, including the number of outstanding BNPL loans, total BNPL loan amounts, and BNPL payment status.

By accurately identifying customers and assessing risk in real-time, businesses can make confident lending and fraud prevention decisions. This can help prevent spoofing attacks, which occur when a threat actor impersonates a trusted source to gain access to sensitive information.

To establish a comprehensive BNPL risk management strategy, businesses should combine prevention and detection techniques to guard against multiple threats. This can be achieved by monitoring transactions for suspicious patterns, such as logins from multiple devices and IP addresses, multiple payment attempts using the same card, or attempts using details that have been reported as stolen.

BNPL transaction monitoring is a crucial step in preventing fraud. By keeping an eye on transaction data, businesses can identify red flags and take action to prevent fraudulent activity.

BNPL fraud has a ripple effect that goes beyond the financial loss for the provider. In most cases, the BNPL provider accepts liability for any fraud that occurs on their platform, as they act as both the payment and lender.

For customers, BNPL fraud can lead to fraudulent purchases, stolen personal details, and damaged credibility and creditworthiness. This can prevent them from using finance options in the future.

Merchants also face a significant risk of reputational damage if they fail to prevent BNPL fraud. This can impact relationships with customers, suppliers, and even BNPL providers.

BNPL fraud can lead to a loss of market share for merchants who don't address the issue. A ML-powered fraud prevention tool can help detect bad actors quickly without chasing away legitimate customers.

Here are the potential impacts of BNPL fraud on customers and merchants:

Cost responsibility in the context of BNPL is clear-cut. The party that authorizes the payment is ultimately responsible for any fraud that occurs on an account.

In most cases, BNPL providers will accept liability for any fraud that occurs on an account hosted on their platform. This is because they act as both the payment and lender.

The BNPL provider's role in payment and lending makes them accountable for any fraudulent activities that take place on their platform.

For customers, the impact of BNPL fraud is clear: fraudulent purchases using their account and card that they won't always be able to reclaim.

Stolen personal details can leave customers vulnerable to further fraud, which is a serious concern.

Customers who are victims of BNPL fraud may also experience damaged credibility and creditworthiness, making it harder for them to use finance options in the future.

Reputational damage is a major risk for merchants who fail to prevent BNPL fraud, which can impact relationships with customers, suppliers, and even BNPL providers.

If a merchant's site is compromised by BNPL fraud, customers will likely stop shopping with them, which can be devastating for businesses.

BNPL providers also take a hit when their services are used for fraudulent activities, which can lead to further losses and exposure to risk.

Protecting your market share from fraud is crucial in the BNPL industry. Companies like FairMoney have successfully implemented ML-powered fraud prevention tools to detect bad actors quickly.

The consequences of not addressing fraud risks are severe, and you risk losing market share to competitors who prioritize fraud prevention. SEON's data enrichment modules and device fingerprinting have helped FairMoney stop fraudsters in their tracks.

A 30-day trial of SEON's end-to-end fraud prevention solution is available, complete with free support. This can give you a chance to see how SEON can help your BNPL business.

BNPL services continue to grow explosively, with a projected market size of US$ 3268.26 Bn by 2030. However, this growth also attracts more fraudsters, making it essential to act quickly to avoid losses.

Here are some key statistics on the growth of BNPL services:

By prioritizing fraud prevention, you can protect your market share and provide a better experience for your customers. SEON's solution can help you achieve this, with a free trial available to get started.