Buy Now, Pay Later: How Next-Generation Financing Platforms Can Survive New Frontiers of Scams

According to a September survey by Accenture, approximately 45 million BNPL users in the United States alone have grown by more than 300% year-on-year since 2018, according to Putrust. .. E-commerce merchants are fully involved in the partnership with the BNPL platform, providing short-term funding to those seeking it. Obviously many do.

However, as with any new financial product, you need to be careful. There is no doubt that the BNPL scheme has proven to be advantageous to fraudsters as a means of new payment fraud. These platforms are at a crossroads as BNPL attracts regulatory oversight. Will a well-developed risk strategy with proper analytical guardrails help secure the future of this payment modality?

Next Generation Layaway: BNPL is defined

BNPL is a short-term credit line offered at the time of sale, either directly or online. Amounts typically range from less than $ 100 to $ 10,000. Unlike traditional credit lines, BNPL accounts do not require a full credit check, so even people with no or bad credit can easily get approval.

Think of BNPL as a modern reserve program. Consumers pay in installments instead of paying the full amount in advance, as in the first popular reserve plan during the Great Depression. What’s the big difference?This reserve reboot provides Immediate joy: Buyers receive their purchases immediately, without waiting for payments to be completed.

Merchants offer BNPL to attract new customers, especially those who are unlikely to abandon their carts and are willing to spend cash on high-value items. Many BNPL service providers do not even charge interest or fees if payments are made on time and the remaining balance is paid in full. Instead, the merchant pays a percentage fee per transaction.

This flexible payment model has proven to be particularly attractive not only to millennials, but also to Gen Z, the fastest growing consumer segment. Generation Z has an estimated population of 78 million in the United States by 2034, making it the largest generation ever in the United States. Overall, 22% of the five holiday shoppers who used the BNPL service in 2020 were Zoomers.

Unregulated, fraudulent Wild West

Currently, most BNPL products are not regulated by the Truth in Lending Act, so the status of BNPL is rarely checked. Financial losses are absorbed by the merchant or the platform itself. Fraud countermeasures tend to rush to take backseats to gain market share, as most BNPL platforms rely on VC funding backed by well-funded investors with heartfelt risk aspirations. I have.

However, without proper fraud protection, BNPL merchants and vendors are at risk of dying from a $ 1,000 savings. Here, it absorbs $ 100 bills, absorbs $ 500 bills, and grows in large numbers. There are two common types of fraud behind this potential “slobe lead” scenario.

• Synthetic ID fraud. BNPL providers are particularly vulnerable to synthetic identity fraud. This is because many BNPL shoppers have little or no credit history, and most BNPL services only “soft-pull” consumer credit. Simply put, fake shoppers with thin credit profiles are relatively easy for scammers to create.

• Account takeover (ATO). Fraudsters access the customer’s BNPL account and often continue to spend, trying to resell the stolen goods. Victims of ATO are often too late to detect fraud because account owners are not immediately charged.

Fraudsters are already taking advantage of the gap between merchant fraud control and BNPL provider control. For example, some merchants completely avoid their own fraud prevention systems because the BNPL provider is responsible for fraudulent chargebacks. Familiar scammers can quickly find these vulnerabilities in the BNPL ecosystem and make significant profits.

Cumulative fraudulent losses can force BNPL providers to pass on some of these costs to retailers, or ultimately to the account owners themselves, in the form of fees or high fees. .. Either result can result in a loss of luster for payment options. It is assumed that the loss itself does not impair or terminate the functionality of some BNPL platforms.

Retailers and BNPL platforms should likewise take into account the loss of reputation from exposing their customers to potential fraud.

Counterattack

Strong fraud protection is the best attack against BNPL fraudsters. At a minimum, BNPL service providers must incorporate digital / biometric identity verification and transaction monitoring capabilities into their platforms.

Identity verification is especially important during the application process. Most BNPL systems simplify the sign-up process because users upload documents to prove their identity. By adding both digital / biometrics and activity checks, BNPL vendors can make the verification process more resilient with less friction.

After the new account validation process, the BNPL service should protect against account hijacking using a layered strategy such as:

• Implement a risk-based multi-factor authentication and verification process.
• Establish appropriate limits and add real-time account freeze functionality.
• Works with other authentication factors to collect and analyze user device data, geographic location, time of day, and other information.
• Apply machine learning (ML) models to event and transaction data to ensure accurate anomaly detection.

On the merchant side, retailers need to be keenly interested in the fraud prevention features of BNPL providers. In addition, if possible, you should enhance them with your own automated fraud detection tool as an additional layer of protection. Optimizing the customer experience is paramount to both parties. Importantly, this also includes protecting each other’s customers from online glyphers.

The future of BNPL

With the help of retail partners, BNPL vendors can continue to grow demand for flexible financing options while protecting consumers and their platforms from fraud. They only need to apply the same powerful data analysis tools that have proven effective by more mature financial services players.

Ultimately, a robust fraud prevention stance can do more than protect your customers and the revenue of the BNPL platform. In increasingly crowded spaces, you can easily differentiate your BNPL platform from your competitors by incorporating a powerful ML / AI model and layered fraud protection.

As the federal government has shown greater regulatory oversight and a focus on consumer protection, BNPL service providers and retailers are keenly interested in actively fostering a credible reputation. What they do in response to increasing fraud risk will help shape this industry – and perhaps determine whether BNPL will survive, prosper, or go on a reserve path.

Thomas French is SAS’s Senior Fraud and Security Intelligence Advisor.