How to Protect Payments From Buy Now, Pay Later Fraud

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The holiday shopping season is here and for many merchants, it’s the busiest and the most profitable time of the year. It’s also quite a juicy season for the fraudsters who monitor changes in consumer behavior and who are always on the lookout for the next lucrative opportunity. This year, they have something new to work on – finding gaps in the security of the Buy Now, Pay Later (BNPL) services that are becoming more mainstream.

A recent Cardify survey of more than 2,000 consumers showed that nearly half of them (45.1%) plan to use BNPL services for their holiday shopping. CNBC also reports that a separate survey from Oxygen, an online bank, revealed that 56% of shoppers have already made a purchase with BNPL that they couldn’t pay off.

In the UK, more than 17 million customers have used a BNPL company to make their purchases, while in the USA, 56% of surveyed consumers have used a BNPL service at least once.

As shoppers get increasingly comfortable with BNPL payment options, it brings attractive opportunities for merchants and financial institutions to increase their revenues. However, rapid adoption of the BNPL services also comes with a significant risk to the providers who have to make their credit approval decisions in real-time, while simultaneously ensuring that their transactions are protected from growing cyber threats.

BNPL: How It Works

Buy Now, Pay Later is the fastest-growing payment method. It allows consumers to pay for their product or service in several installments, often interest-free. Compared to credit cards, installment buying makes it easier to buy the big ticket items by giving the shopper more time to pay down the balance without high interest charges.

Two COVID-related factors that have contributed to the rapid adoption of BNPL are the growth of online shopping, and the move by some consumers to avoid or reduce credit card debt.

Buy Now, Pay Later Opportunities for Merchants and Financial Institutions

According to a survey by PayPal and Netfluential, consumers like the convenience of using BNPL, with 28% of consumers age 18-39 more likely to shop at a merchant that offers BNPL. A flexible payment option can increase customer loyalty and make it more affordable for the consumer to buy even more.

For B2B merchants, BNPL makes cash flow more predictable and attracts new clients from small and mid-sized businesses that are in need of financing options for growth. For many financial institutions, this payment method can be viewed as an opportunity to reach a market that is not effectively served today. For example, it can attract younger consumers who are looking for a credit card alternative.

As fintech BNPL platforms such as Klarna and Affirm are gaining popularity, banks and payment providers have started launching their own installment programs. Chase launched its BNPL option My Chase Plan for credit card holders in 2020, and Mastercard unveiled their Mastercard Installments program in September 2021.

Buy Now, Pay Later Threats

While BNPL is quite a lucrative program for financial institutions and merchants, it’s often a target for fraudsters due to the following factors:

  1. The credit decision happens in real-time. The BNPL provider has to approve the purchase decision when a customer is completing the transaction. This way, a fraudster can use a stolen card or a synthetic identity to buy a product or service.
  2. The repayment is delayed. Fraudsters commit account takeover fraud, where they steal personal financial information and then use it to complete a transaction. They may even pay for the first installment, but the customer may not even notice it since the payment is delayed or the installment sum is relatively small.
  3. Absence of formal credit checks in some cases. Unlike traditional banks, Fintech BNPL platforms don’t conduct long formal credit checks. Instead, they use algorithms to determine the credit score based on the information available to them. It’s also much easier to go unnoticed as a fraudster when many other people are applying for a credit during a busy holiday shopping season.

How to Prevent BNPL Fraud and Revenue Loss

For merchants and financial institutions, the key to securing the BNPL payments is to be proactive with fraud prevention, to have payment transaction data available in real-time, and to know their customers well.  

“Fraudsters see Buy Now, Pay Later platforms as a perfect opportunity for financial crime due to the speed with which a transaction happens, and more relaxed security policies compared to traditional lenders,” explains Bijan Sanii, President, CEO & Co-Founder of INETCO. “Purchase transactions are almost instant, and the approval decision depends on the data available at that moment. Your fraud detection system should be able to build a customer profile in real-time, so that you can detect and block fraud in milliseconds.”

When a BNPL transaction happens, it passes through multiple points on the back-end where certain data loss can occur. If set incorrectly, fraud prevention software can block too many legitimate transactions from good customers, resulting in false positives. This negative customer friction results in revenue loss and unhappy customers.

“The more precise your fraud prevention and blocking is, the better you are protected from payment crime,” says Sanii. “We recommend moving fraud detection earlier in the process, capturing raw data at the network level. We use machine learning algorithms to build individual customer profiles on the fly, based on the real-time transaction data, and that level of precision allows us to block only fraudulent transactions, letting the valid ones in.”

Even as fraud prevention tools for BNPL and other payment methods become more and more sophisticated, fraudsters come up with new improved tactics and techniques. A new e-commerce fraud report warns European retailers of a 350% increase in fraudulent online orders. To stay competitive and profitable while offering BNPL services, merchants and financial institutions need to improve their fraud prevention precision, be proactive with their cyber security programs, and remain vigilant against the potential threats.

Ready to uplevel your payment security and avoid false positives losses? Schedule a free consultation with one of our experts.

By: Vlada Terenina [INETCO]

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