Online shopping has become more convenient than ever with the emergence of new payment solutions like Buy Now Pay Later (BNPL) services. These services allow consumers to make purchases and defer payment until a later date, making it an attractive option for many. However, with the rise in popularity of this payment method, there has also been an increase in fraudulent activities.
This article aims to educate BNPL service providers on the threat fraud poses to their businesses and the different ways they can mitigate BNPL fraud, including integrating AI and ML-based identity verification and fraud detection solutions during the customer onboarding process.
What is Buy Now Pay Later and How Does it Work?
Buy Now Pay Later (BNPL) is a payment option that allows consumers to make purchases and pay for them in smaller installments over time. These installments can be weekly, bi-weekly, or monthly, depending on the terms and conditions set by the service provider. The convenience and flexibility of this payment method have made it popular among consumers, especially e-commerce shoppers, as it makes goods more affordable.
To utilize the Buy Now Pay Later option, consumers typically need to create an account and perform routine KYC and identity verification by providing their personal information, such as name, address, and identity documents. In some cases, the BNPL provider also conducts a credit check to assess the consumer's eligibility for the service.
Once the account is set up, consumers can browse participating online stores and select the items they wish to purchase. At the checkout, they can choose the Buy Now Pay Later option and select their preferred installment plan. The total amount is divided into equal or variable installments, and the consumer is provided with a schedule of payment due dates.
What is Buy Now Pay Later Fraud?
Buy Now Pay Later Fraud, or BNPL fraud for short, is a form of financial crime targeted at BNPL operators. It occurs when bad actors exploit the convenience of BNPL payments to make fraudulent transactions.
They often do this by generating fake identity data, using stolen or synthetic identities, performing identity farming, or employing other manipulative techniques to pose as legitimate customers and disguise their criminal activities.
Common Types of Buy Now Pay Later Fraud Tactics
Some common types of Buy Now Pay Later fraud include:
Account Takeover Fraud
One of the most prevalent types of BNPL fraud is account takeover fraud. Here, fraudsters gain unauthorized access to a victim's account, often through phishing, password cracking, or malware. They can use this access to change the shipping address details and make fraudulent purchases without the account holder's knowledge.
Synthetic Identity Fraud
With synthetic identity fraud, the fraudster manipulates the BNPL application process and uses false documents or stolen identities to create fake accounts. They also use a combination of real and fabricated information like BVN, phone numbers, and names. Once the account is approved, they use it to make fraudulent purchases before disappearing without a trace. This form of fraud can only be successful if the BNPL provider has not integrated robust identity verification checks.
Friendly fraud, also called chargeback fraud, occurs when legitimate customers make a purchase using BNPL services, receive the merchandise, and then request a chargeback from their bank, claiming they never received the goods or services bought.
Triangulation fraud is a complex scheme where fraudsters operate fake online storefronts, collect payments from unsuspecting buyers, and then use stolen credit card information to buy the same items from legitimate online marketplaces, which are shipped to the buyer. Along the way, the fraudster profits from the price difference.
How to Prevent Buy Now Pay Later Fraud
Here are some preventative measures providers can take against BNPL fraud. When executed effectively, they can serve as a robust shield against fraudulent activities and misuse of the BNPL services.
Implementing Biometric Verification
Biometric verification uses biological characteristics such as fingerprints, voice, or facial recognition to verify identities. It makes the verification process more secure as these characteristics are unique to each individual and difficult to forge.
Implement Robust Identity Verification Processes
Implementing robust identity verification processes is one of the most effective ways to prevent BNPL fraud. BNPL providers should verify the identity of customers to ensure that they are who they claim to be. This can be done through various methods, such as requiring customers to provide government-issued identification, verifying their contact information, and using biometric authentication methods like fingerprints or facial recognition.
Employ Advanced Fraud Detection Tools
Utilizing advanced fraud detection tools can significantly help in preventing BNPL fraud. These tools use AI and ML to analyze customer behavior, detect suspicious patterns, and identify potential fraudulent activities. By monitoring transactions in real time and flagging any suspicious activities, BNPL providers can take immediate action to prevent fraud.
Set Transaction Limits and Monitoring
Setting transaction limits can be an effective way to prevent large-scale fraud. BNPL providers can set limits on the maximum amount that can be financed or the number of transactions a customer can make within a certain time frame. Also, continuously monitoring transactions can help identify unusual or suspicious activities, allowing for prompt intervention.
Educating customers about the risks and precautions associated with BNPL services is crucial in preventing fraud. BNPL providers should provide clear and concise information about the terms and conditions, payment schedules, and potential consequences of fraudulent activities. By raising awareness among customers, they can make informed decisions and take necessary precautions to protect themselves.
Buy Now Pay Later Fraud Red Flags and Warning Signs to Watch Out For
BNPL providers need to be vigilant and aware of the red flags and warning signs associated with fraud. Here are some key indicators to watch out for:
Unusual Purchasing Patterns
One of the first red flags for BNPL fraud is when a customer exhibits unusual purchasing patterns. This could include making multiple high-value purchases within a short period, especially if it is inconsistent with their usual spending behavior. Keep an eye out for customers who frequently switch between different BNPL providers or use multiple accounts for similar purchases.
Incomplete or Inconsistent Information
When collecting customer information, BNPL providers should verify the accuracy and consistency of the data provided. Fraudsters may provide incomplete or false information, such as mismatched addresses or contact details.
Unusual Shipping Requests
Fraudsters often try to divert shipments to a different address or request faster shipping to reduce the chances of being caught. BNPL providers should be cautious when customers request changes to the shipping address, especially if it is different from the billing address. Also, large orders with rush delivery requests should be thoroughly examined.
Unusual Account Activity
Monitor customer accounts for any suspicious activity, such as multiple failed payment attempts, frequent password resets, or sudden changes in account information. These can be indicators of unauthorized access or fraudulent activity.
Rapid Account Creation
Fraudsters may create multiple accounts in a short period using different identities or stolen information. BNPL providers should monitor for rapid account creation and investigate any suspicious activity. It may be a strong sign of fraudulent activity if all the opened accounts originate from the same location or IP address.
Suspicious Email Addresses or Phone Numbers
Fraudsters often use fake email addresses or phone numbers to create accounts or contact BNPL providers. Providers should verify the authenticity of the contact information provided by customers and be cautious when dealing with suspicious email addresses or phone numbers.
Protect Your BNPL Platform From Fraud with Dojah
Dojah helped CDCare mitigate fraud and reduce their customer verification time by 48 hours, and we can help you, too.
Start leveraging our all-in-suite of identity verification, transaction monitoring, fraud prevention, and customer onboarding solutions to combat fraud and stay one step ahead of bad actors.
Contact us to learn more about Dojah's onboarding and fraud prevention solutions, or schedule a demo session. Also, explore our website and documentation to learn more about our product offerings.