Buy Now, Pay Later scheme offers are irresistible to consumers as they enable them to access goods and services without paying them in full immediately. Businesses also prefer such schemes as they help them increase sales and revenue. According to a Grand View report, 2023,
The BNPL market is estimated to reach nearly $6.3 trillion by the decade’s end. Just as customers are willing to take advantage of the perks associated with these deals, so too do fraudsters.
A FICO report says that 23% of US consumers reported that their information was used to open a BNPL account without their consent.
Hence, merchants — and the BNPLs- need to be aware of potential risks. The only way to do this is by understanding what this fraud does and how they can use it against us. Here is what our post covers to help you not only realize the potential threats but also avoid them as well.
What Is BNPL Fraud?
Buy Now Pay Later (BNPL) fraud is any fraudulent activity related to BNPL systems aimed at deceiving businesses to achieve unsolicited personal gains.
This happens as payment processors and merchants expand the options available for online purchases.
However, the problem is these innovative payment solutions also introduce unique vulnerabilities to fraud. Unlike traditional financial sectors,
Ecommerce players offering BNPL must proactively implement effective fraud prevention measures. This is a crucial step in maintaining a secure environment without compromising customer experience, and it’s why they need to strike the right balance.
Striking the right balance between security and convenience is essential to prevent high churn rates, protect brand reputation, and safeguard revenue.
Types of BNPL Frauds
Here are different categories of BNPL frauds that merchants need to be aware of:
- First-party Fraud
Fraudsters might take advantage of BNPL promotions using their personal identities but with no plans to make payments. In most cases, this happens because there are no robust collection mechanisms in place by BNPL service providers.
- Account Takeover Fraud
Fraudsters access legitimate BNPL accounts illegally enabling them to buy products without consent from account holders. Phishing or other methods that compromise login may lead to this kind of incident.
- New Account Fraud
Con-artists create fake accounts using stolen identities for the purpose of exploiting weak verification procedures.
- Synthetic Identity Fraud
This entails applying for BNPL servers using a fake name consisting of both authentic and fictitious elements. This makes it hard for suppliers to detect scam users.
- Fraudulent Chargebacks
Con-artisans purchase items and then dispute their charges taking advantage of BNPL system’s leniency over chargebacks.
- Never-pay Fraud
Users obtain goods or facilities via BNPL intentionally without planning on any repayments exploiting payment deferrals model.
- Transaction Fraud
It involves disguising the source of illicit funds through BNPL channels, complicating illegal transaction tracking.
Risks Associated with BNPL Frauds
Here are some risks associated with BNPL Frauds
- Reputational Risks
BNPL fraud means that an unauthorized party gained access to the app and made a purchase on behalf of a consumer, causing significant reputational risks. This is explained by inconveniencing the customer by misusing their sensitive personal information to fuel the fraud risk and tarnish the company’s reputation in the market.
However, customers will think that the merchant is unsafe and unable to protect them from fraud. Hence, customers will not trust the merchant and will be reluctant to shop, thus affecting the reputation and revenue of the company.
- Financial Risks
Usually, fraudulent purchases are reimbursed by the BNPL provider, not the merchant. At the same time, for the purchase to be dishonest, it must be made through the merchant’s platform. Subsequently, the product will have to be returned, resulting in a chargeback cost, with the merchant’s platform solely responsible.
The chargeback fraud incidents will be even more frequent if the merchant has no safeguards. Another aspect is the possibility of becoming a merchant suffering from fraud, which leads to higher costs, severe reputation damages, and the risk of losing the supply of BNPL services.
- Strained Relationship with BNPL provider
If the BNPLcauses fraud on the merchant’s platform, the platform will probably be prohibited from using the services provided by the BNPL provider. This will directly damage relations with the provider and impede the merchant in making and continuing sales.
- Increased Chargebacks
Fraudulent transactions often result in chargebacks, which can be costly for merchants. High chargeback rates can lead to penalties from payment processors and increased scrutiny from financial institutions, further complicating a merchant’s financial situation.
- Operation Risks
Fraud always negatively impacts the functioning of the business because resources should be directed to security management, which undermines the effectiveness of business activity.
BNPL Fraud Prevention Strategies
BNPL fraud prevention strategies focus on robust identity verification, real-time risk assessment, and ongoing transaction monitoring. Here are key strategies to minimize such frauds:
- Multi-factor Authentication
Employing device authentication methods, such as biometric scanners, PINs, or one-time codes, should be used to confirm the user’s identity distinct from the password.
- Advanced Identity Verification
The application or device must have a requirement process to determine the user’s identity, such as photo identification, selfie check, or document verification.
Moreover, algorithms that serve to detect whether the user is authentic, certified to make the purchase, or rather a virtual character, and uses a real-time identity check.
- Device Fingerprinting
A device should have a history of information about it based on its usage, such as past payments or actions of its owner. This history rewrites suspicious patterns or known fraud devices.
- Behavioral Biometrics
A device should have an algorithm that recognizes and analyzes the owner’s behavior across binary actions-like typing speed or mouse movement to determine when the behavior is acceptable.
- Leverage AI/ML
AI-powered systems can analyze enormous amounts of data and in real-time detect fraud, so recurring information is blacklisted.
- Transaction Monitoring
An app ought to read all purchases to detect odd patterns about a certain transaction, such as too far or too much, or a high-risk merchant category.
- Set Limits
There should be a threshold limit on how many applications a device has to issue to prevent them from super-frequently trying to fraud.
- Address Verification
If the shopper maintains different addresses, there should be a computer-level rule in place to allow this action. Any other situation should be considered suspicious.
- Credit Bureau Integration
If a person has a credit report, it must be analyzed, and the two must match to verify the identity.
- Customer Education
The user needs to be informed of security concepts about BNPL accounts.
Best Practices for Merchants
Merchants can implement best practices to reduce the risk of BNPL fraud, such as:
1. Employ Advanced Fraud Detection Tools
Invest in AI and machine learning fraud detection tools to identify suspicious transactions and flag potential fraud.
2. Regular Staff Training
Educating employees about common frauds and what are the signs of potentially fraudulent activities can strengthen the overall defense.
3. Secure Payment Gateways
Utilize secure payment processing systems and ensure compliance with the Payment Card Industry Data Security Standard (PCI DSS).
4. Monitor Return Requests
Keep an eye on return patterns that may indicate abuse of the BNPL system, such as excessive returns by the same account.
5. Limit Transaction Amounts
Establishing limits on transaction amounts for new BNPL users can further mitigate risk.
Emerging Trends in BNPL Fraud Detection Mechanism
Fraud detection platforms are in high demand owing to increasing instances of online frauds. These tools are becoming more robust as they employ AI and ML algorithms, behavioral analytics and device fingerprinting technologies. With time these technologies will become more precise.
Additionally, regulatory frameworks are still developing around BNPL services. Know Your Customer (KYC) and Anti-Money Laundering (AML) are most likely to become mandatory in the future.
Regulatory bodies are increasingly focused on developing regulatory frameworks to mitigate fraud risks. This could include stricter guidelines on data security and consumer protection measures.
The future of BNPL fraud prevention will depend on adoption of cutting-edge technologies and stringent regulations. BNPL vendors can improve their resistance to fraud by utilizing AI, machine learning, and comprehensive identity verification processes.
How SensFRX Can help
SensFRX is a powerful fraud prevention platform that can prevent Buy Now, Pay Later fraud. The system is a comprehensive solution to the unique challenges.
SensFRX AI has all features and functionalities for BNPL fraud prevention. Real-time monitoring, behavioral analysis, and customizable security options are providing cutting-edge means for BNPL providers to ensure the secure identity of their users and achieve maximum transaction safety.
It has the following features and functionalities:
1. Real-Time Monitoring
SensFRX leverages AI/ML algorithms to ensure that any fraudulent activity is detected in real time. This helps security teams take the necessary steps to protect against BNPL fraud.
2. Behavioral Analysis
The system analyses user behaviors to detect any unusual behavior in time. For example, if users typically log in to their accounts at a certain time of the day, any log-in attempts outside the typical range should be monitored. Moreover, if a user constantly logs in from a laptop and suddenly changes his device, SensFRX is likely to detect fraud.
3. Identity Verification
SensFRX supports identity verification processes to ensure that users are who they claim to be. Know Your Customer KYC checks are especially important for BNPL to prevent account takeovers and fake accounts that are popular in this sector.
4. Multi-Factor Authentication MFA
This feature implies that users should provide several proofs of their identity before being granted access to their account. MFA increases security as fraudsters must obtain all forms of identity to submit.
5. Real-time Notification
SensFRX supports timely fraud alerts that allow the transaction to be stopped before it is finalized. This way, the system also reduces chargeback rates.
6. Customizable Rules
Users can adjust the validation rules and security policies to their unique business needs and risk tolerance based on their industry requirements.
7. Ease of Integration
The platform can be easily embedded into any web or mobile application. The system is essential for effortless BNPL implementation.
8. Unified Dashboard
BNPL providers can benefit from an intuitive dashboard with broad visual analytics options.
9. 24/7 Support
SensFRX offers robust customer support that ensures the operational efficiency of fraud prevention.
Online marketplaces are increasingly drawn to Buy Now, Pay Later (BNPL) offers because they not only attract new customers but also empower shoppers to make purchases they might not otherwise consider. However, these offers also present a significant temptation for fraudsters, providing them with ample opportunities to acquire goods at little to no cost.
BNPL fraud can manifest in various forms, but it fundamentally revolves around exploiting the essential features of these payment structures. Typically, fraudsters capitalize on the deferred payment model, which allows for an initial payment to be postponed for months or even years.
Final Thoughts
Online marketplaces are increasingly drawn to Buy Now, Pay Later (BNPL) offers because they not only attract new customers but also empower shoppers to make purchases they might not otherwise consider. However, these offers also present a significant temptation for fraudsters, providing them with ample opportunities to acquire goods at little to no cost.
SensFRX is a powerful fraud prevention platform that analyzes a large number of signals and data to generate real-time red flags. Book for a free trial to learn how it can help.