The “buy now pay later” (BNPL) solutions are quickly gaining adoption as consumers look for new financing options and merchants aim to drive sales. More than one-third of the United States and United Kingdom shoppers use BNPL options, including half of Gen Z and the millennial generations.
In addition, as many as 30% of Australian adults now have one or more Buy Now Pay Later accounts, which makes for roughly 5.8 million users nationally.
How Consumers see the By Now Pay Later Option
The BNPL option provides a comforting financing option for those who need it.
Consumers see BNPL as an option to:
- Avoid paying credit card interest
- Make purchases that ultimately would not fit their budget
- Borrow money without a credit check
- Purchase if the consumer dislikes using credit cards
- Circumvent getting approved for a credit card
- Purchase because their current credit cards are maxed out
One commonality within the ever-growing list of BNPL providers is that they mainly offer ‘no fraud liability’ to the merchants they service. Many merchants see this as a reason to give the green light to processing all BNPL orders, no matter how risky they may otherwise look.
While BNPL orders may not result in direct chargeback costs to the merchant, there may be indirect consequences for merchants that process all such orders.
A Closer Look into BNPL
BNPL services are growing at a rate of 39% a year, with its market share set to double by 2023. By then, 3% of global e-commerce spend will be through BNPL services. Furthermore, 85% of consumers who have used BNPL services plan to continue doing so in the future.
BNPL is here to stay, therefore merchants should understand the ins and outs of the process and how BNPL fraudsters can affect their business.
If fraudsters discover that they can successfully place BNPL orders on your site without being detected, the chances are they’ll publicize this on both the dark web and more public forums. This publicity of being ‘wide open’ can make your store a target for additional fraudulent orders and other types of fraud, including regular credit card fraud.
The simplicity and increasing adoption of BNPL orders can leave merchants exposed and vulnerable to unpredictable fraud losses and a negative PR outlook from brand loyalists.
The threats BNPL solutions pose to payment incumbents—including card networks and issuers—are growing, and recommendations for vendors vary on vertical, location, processes, and everything in between.
Differing Fraud Detection
BNPL providers will naturally only fraud screen BNPL orders. Without a holistic view of all orders, BNPL orders that match a store’s unique fraud pattern might not be identified and stopped.
Fraudsters will use these alternative ways of getting a merchant’s products where there is no other method to do so.
Fraudsters are usually very smart. They know merchants may assume orders created with certain payment methods have no fraud liability to them and auto-approve those orders (per existing business practices). So, fraudsters will place their initial order attempt via one of these companies to establish legitimacy as a customer.
Once that order goes through, many merchants and fraud systems will consider that customer a ‘trusted’ customer. The fraudster will then change the payment method on that account and make additional orders with actual stolen credit card information.
BNPL Whitelisting Fraud Pattern
A specific fraud pattern involving BNPL orders is increasing in popularity. The pattern contains the following steps:
- A fraudster places a couple of low-value BNPL orders with a merchant.
- The merchant processes the BNPL orders without proper fraud screening, as they know they will not be liable if it is a fraudulent order.
- The fraudster then places a high-value credit card order with a stolen credit card.
- The merchant approves and processes the high-value credit card order, as they view the shopper as a trusted repeat customer.
The fraud departments of many BNPL providers are now in a position of playing catch up. Some providers are altering their contracts to place more onerous conditions on merchants regarding fraud liability. It is essential for merchants to pay close attention to these conditions and to be as prepared as possible to meet those conditions.
Merchants Need to Consider the Risks
Merchants need to understand that before approving and processing all BNPL orders, they must consider the above risks and not disregard suspicious orders.
With BNPL, fraud rates may rise because merchants may loosen their fraud techniques for the sake of acquiring the sale. As a result, cybercriminals will gravitate toward merchants that have less fraud protection to find the path of least resistance.
There is no overarching approach other than ensuring your fraud detection techniques evolve and adapt to the growing market to avoid getting blindsided by evolving cyber-attacks.