Curious about buy now, pay later fraud? We explain what it is, how it happens, and how to protect your organization and your customers.
What Is Buy Now Pay Later Fraud?
Buy now, pay later (BNPL) is a payment form that enables customers to make purchases that are repaid in fixed installments. BNPL fraud occurs when a fraudster infiltrates an existing BNPL account and uses it to make unauthorized purchases, or leverages synthetic identity information to open a new BNPL account.
As BNPL installment usage explodes, fraudsters are finding clever ways to exploit this innovative form of financing. Some fraudsters open fake BNPL accounts using stolen or synthetic identity information. Some pirate existing BNPL accounts using stolen login credentials in order to make unauthorized purchases. Banks, credit card companies, and platform providers can end up losing 100% of a loan’s value through fraud.
How Does Buy Now, Pay Later Work?
BNPL platforms such as Affirm, Zip, Flex, and Afterpay offer consumers zero-interest credit to purchase everything from gaming consoles, to groceries, to garbage disposal fees and more. Payments are made on a fixed monthly schedule.
Merchants like Sephora, Macy’s, and Target that partner with BNPL providers often pay as 6% of the total purchase price. While this fee may seem high, BNPL helps increase conversions by reducing sticker shock for customers. Sephora, for instance, has seen a 65% increase in average order value when customers use BNPL, according to BloombergBusinessweek.
After all, $41.60 per month for 12 months interest free can be a lot more palatable than $500 upfront. The fact that 51% of all US consumers have used BNPL just since the start of the pandemic is testament to the popularity of this form of payment. By some analyst estimates, BNPL could top $1 trillion in yearly purchase volume within the next three years. But it doesn’t come without challenges.
Buy Now, Pay Later Risk
Barely a blip just a few years ago, BNPL has achieved meteoric growth by offering cash-strapped Millennials and others a compelling alternative to credit cards.
While this has proven to be an efficient form of financing for most, one recent study found 45% of BNPL users have poor credit histories and may not have met the requirements to be approved for a credit card. More than 36% have fallen behind on payments, with 72% saying they believe it has negatively affected their credit scores.
As a result, some BNPL providers report millions in credit losses. And regulators in the US, Australia, the UK, and elsewhere are now actively scrutinizing BNPL practices. Yet even while providers expand their offerings to wealthier consumers and work to assuage the concerns of regulators, they still face a far bigger risk.
The Ugly Face of BNPL Fraud
The most popular form of buy now, pay later fraud occurs through account takeover (ATO). With the dark web awash with stolen or breached login credentials, cybercriminals can easily access the logins they need to infiltrate accounts and go on illegal shopping sprees. Not only is the victim left to pay the bill, but a BNPL account takeover can lead to a much larger financial nightmare.
Another method of committing BNPL fraud that is gaining traction is the use of synthetic identity information to game the BNPL account enrollment process and defraud companies directly.
Synthetic identity theft is one of the fastest-growing financial crimes in the United States, costing financial institutions an estimated $20 billion in losses annually. And ATO fraud growth across all industries has been fueled by the surge in data breaches in recent years, increasing 850% between Q2 2020 and Q2 2021, according to studies cited by The Payers.
Throw in a nascent, largely unregulated form of credit like BNPL, and these figures could skyrocket.
What’s more, cyberthieves are just getting started in this space. By comparison, card-not-present (CNP) fraud accounts for over half of all gross fraud losses worldwide, despite hardened defenses and highly-regulated credit practices.
Without proper protections in place, organizations across the BNPL ecosystem are likely to get hammered hard by fraudsters.
How to Prevent Buy Now, Pay Later Fraud
In order to defend themselves, organizations will need to implement defenses against new risks and evolving attack methods beyond CNP fraud—without sacrificing convenience and choice for consumers. This includes protections against account takeover and account enrollment fraud that leverage machine learning and data science to stop fraud without creating friction for legitimate customers.
Outseer’s Buy Now, Pay Later Installments solution, for instance, addresses these challenges by providing continuous authentication throughout the digital payments journey. This includes end-to-end protection for cardholders as they enroll, shop, and manage BNPL installment transactions. Leveraging the Outseer Emerging Payments platform, our BNPL solution protects against synthetic identity fraud, account enrollment fraud, CNP fraud, account takeover and more.
Preventing BNPL Fraud With Outseer
Outseer provides seamless fraud protection that defeats both fraud and user friction at the same time. Through machine learning, data science, and advanced risk scoring, Outseer prevents 95% of all fraudulent transactions, with intervention rates as low as 5%.
That’s the best performance in the industry. By seeing what others can’t, we stop fraud long before a transaction ever occurs—enabling buy now, pay later to continue its rapid growth rate, securely. To learn more about our BNPL offerings, click here.