Combatting the Rising Risk of Buy Now, Pay Later Fraud  

Fraudsters are continually evolving and adapting their approaches in order to capitalize on the way technology and digital channels are being used today. As a result, they are also getting smarter, tricking even the savviest of online users into parting ways – knowingly or unknowingly – with their money.

Buy Now, Pay Later (BNPL) fraud is a prime example of this, impacting BNPL providers, online retailers, as well as members of the general public – namely the younger, technologically savvy generation.

What is BNPL?

Buy Now, Pay Later, or BNPL, is a payment method that allows consumers to buy products for immediate delivery but with (seemingly) interest free payments paid over a period of instalments, ranging from three to 36 months. Although, some BNPL providers charge hidden origination, transaction and late payment fees.

This service can also be considered as a “point of sale loan” on specific transactions, but without a full credit check. Seen in this way, BNPL offers a far cheaper alternative to the troublesome payday loan providers and other fee-charging consumer credit options, such as credit cards, loans, or overdrafts.

The Current BNPL Market

There are already some big players in this space such as Klarna and Afterpay, and unsurprisingly, other well-established businesses want a piece of the pie. Amazon, PayPal, and Square are all making multi-billion-dollar acquisitions of existing BNPL companies, while some of the challenger banks re-develop their current offerings.

In January 2022, banking-as-a-service platform, Railsbank announced that it had built a white label BNPL product that will enable retailers to build their own branded Buy Now, Pay Later programs to mitigate the need for BNPL providers, while prioritizing a more direct engagement with consumers. In March of this year, NatWest announced plans to join the BNPL market, launching this summer.

The Impact of Increased Regulatory Scrutiny

In October 2021, HM Treasury issued a consultation paper on the regulation of the BNPL market. This followed the February 2021 publication of The Woolard Review: A Review of Change & Innovation to the Unsecured Credit Market which highlighted:

[The] urgent need to regulate all BNPL products. While the emergence of unregulated BNPL products has provided a meaningful alternative to payday loans and other forms of credit, BNPL also represents a significant potential consumer harm.

The reports also call out the need for governing bodies to work together to identify and remove illegal online lenders and raise awareness of these risks for consumers, in the same way that the FCA has acted around investment scams.

The Challenges BNPL Schemes Pose for Retailers

BNPL is currently the fastest growing online payment method in the UK, with a growth rate double that of bank transfers and more than triple that of digital wallets. The Covid-19 pandemic, which saw stores close, and people shift to remote working, also led to a surge in use of these services. Of the 37% of Brits who have used a BNPL service, 52% of these used it more during the pandemic.

As a result, retailers that introduced the BNPL payment method have grown increasingly popular with consumers, particularly the younger Gen Z and Millennial generations.

Despite these retailers foregoing a cut of each transaction to the BNPL provider, they maintain the view that a BNPL payment option may encourage consumers to make higher value purchases, comforted in the knowledge that they can delay or spread out the cost.

So, what does this mean? While we have all been, at one point or another, the victim of “buyer’s remorse”, the growing BNPL trend will no doubt continue with more people spending increasing amounts of money on higher value products.

But this poses a challenge to retailers. While historic behavior can be used to identify anomalous behavior that needs further attention, as the BNPL market continues to grow and attract new customers, it also encourages existing customers to adapt their ‘normal’ behavior. This can make it difficult to differentiate between legitimate and suspicious activity.

The Opportunity for Fraudsters

BNPL services are popular among consumers, but they also provide new opportunities for fraudsters. BNPL providers have been able to operate without the same regulatory scrutiny and detailed KYC (Know Your Customer) checks that banks and credit card companies are subject to. This means they have not had to implement the same level of controls, making them more susceptible to fraud and reducing their ability to detect risk at the point of sale.

The spike and increased spend on BNPL services during the pandemic, and events like Black Friday Sales, provide the perfect cover for fraudsters to exploit these services and hide amongst legitimate consumers, avoiding detection by traditional monitoring methods.

While the BNPL companies (or the banks that finance them) may bear the risk of fraud losses, the reputational damage is likely to occur at the retailer level with consumers directing the blame for any losses onto the retailers themselves.

With fraud in this sector showing no signs of abating, BNPL providers are under increasing pressure to invest in the right tools to detect and prevent fraudulent activity.

The Opportunities for Improved BNPL Fraud Detection

To effectively detect BNPL fraud, it is vital to identify subtle and connected events and patterns formed over time. But many of the systems in use today detect risk at a single point in time (often at the point of purchase) without considering the bigger picture of risk.

But BNPL providers have the ideal vantage point from which to generate this bigger picture. They can monitor the activity of consumers across all the retailers they represent, enabling them to generate a more holistic 360-view of those consumers and their behavior over time. This would allow them to baseline what is normal and what might be considered suspicious.

Advanced analytic tools like Entity Resolution can be leveraged to bring together data from disparate internal data sources and combine it with up-to-date external data to deliver the context needed to create a single dynamic view of a consumer and the network surrounding them. This context can be used to identify hidden or suspicious relationships or consumer characteristics that might be considered risky. This intelligence would enable the BNPL providers to prevent fraudulent purchases.

Entity Resolution can be performed not only on consumers, but on addresses, phone numbers, devices, and IP addresses helping to identify suspicious activity around entities. This can help illuminate networks of relationships, including social connections and any less obvious or obfuscated connections, that may not be evident at an individual purchase or by using internal data alone.

Advanced Analytics can then be applied to these networks to identify insights and detect unusual behavior to allow for improved and timely decision making at scale.

To overcome the fight against BNPL fraud, it pays to be agile, innovative, and proactive – and leveraging advanced technology is proving to be the most effective solution.