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Buy now, pay later (BNPL) financing reached record heights in 2021. A September study by Accenture revealed some 45 million BNPL users in the U.S. alone, representing more than 300% year-over-year growth since 2018, according to the Pew Trusts. Ecommerce merchants are proving all-in on partnering with BNPL platforms to offer short-term financing to those clamoring for it – and clearly many are. 

But, as with any new financial product, caution is prudent. BNPL schemes are no doubt proving lucrative for fraudsters as a new payment fraud avenue. As BNPL attracts regulatory scrutiny, these platforms are at a crossroads. Could a well-devised risk strategy, equipped with the appropriate analytic guardrails, help secure the future of this payment modality?

Nextgen layaway: BNPL defined

BNPL is a short-term line of credit offered at the point of sale, either in person or online. Amounts generally range from less than $100 up to $10,000. Unlike traditional credit lines, BNPL accounts don’t require a full credit check, making it easier for people with no credit, or even bad credit, to get approved.

Consider BNPL a modern-day layaway program. Like the layaway plans first popularized during the Great Depression, the consumer pays in predetermined installments, instead of paying the full amount upfront. The big difference? This layaway reboot offers instant gratification: the buyer receives the purchase immediately without having to wait until it’s paid off. 


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Merchants offer BNPL to attract new customers, particularly the kind less likely to abandon their carts and more willing to drop cash on higher-ticket items. Many BNPL service providers don’t even charge interest or fees, provided payments are made on time and the remaining balance is paid in full. Instead, the merchant pays a percentage fee on each transaction. 

This flexible payment model has proven particularly appealing not only to millennials but also to Gen Z, the most rapidly growing consumer segment. Gen Z will number an estimated 78 million people in the U.S. by 2034, comprising the nation’s largest generation ever. Put in perspective, among the one in five holiday shoppers who used a BNPL service in 2020, 22% of them were Zoomers. 

Without regulation, a Wild West of fraud 

Currently, most BNPL products are unregulated by the Truth in Lending Act, so the BNPL landscape goes largely unchecked. Financial losses are absorbed by the merchant or the platforms themselves. Because most BNPL platforms are VC funded, backed by deep-pocket investors with hearty risk appetites, fraud safeguards have tended to take a backseat in the rush to seize market share.

Without the appropriate antifraud defenses, however, BNPL merchants and vendors risk death by a thousand cuts – absorbing $100 charges here, $500 charges there, increasing en masse. Behind this potential “slow bleed” scenario lurks two prevalent fraud types: 

  • Synthetic identity fraud. BNPL providers are particularly vulnerable to synthetic ID fraud. This is because many BNPL shoppers have little to no credit history, and most BNPL services only make a “soft pull” on the consumer’s credit. Put plainly, bogus shoppers with thin credit profiles are relatively easy for fraudsters to fabricate.
  • Account takeover (ATO). A fraudster gains access to a customer’s BNPL account and goes on a spending spree, often with the intent of reselling the stolen goods. ATO victims often detect the fraud too late, because the account holder isn’t immediately billed. 

Fraudsters are already exploiting the gaps between the merchants’ fraud prevention controls and those of their BNPL providers. For example, some merchants sidestep their own fraud prevention systems altogether, because the BNPL provider assumes the fraud chargeback liability. Savvy fraudsters quickly find – and profit greatly – from such vulnerabilities in BNPL ecosystem.

The cumulative fraud losses may one day force BNPL providers to pass some of these costs onto the retailers or, ultimately, the account holders themselves in the form of fees and higher rates. Either outcome could cause the payment option to lose its luster – assuming the losses themselves don’t cripple or spell the end of some BNPL platforms. 

Retailers and BNPL platforms alike must also consider reputational tarnish of exposing customers to potential fraud.

Fighting back

A robust fraud defense is best offense against BNPL fraudsters. At a minimum, BNPL service providers should incorporate digital/biometric identity verification and transaction monitoring capabilities into their platforms.

Identity verification is particularly important during the application process. Most BNPL systems make the sign-up process effortless, with the user uploading documents to prove their identity. By adding both digital/biometric authentication and liveness checks, BNPL vendors can make their verification processes more resilient without introducing too much friction.

After the new account verification process, BNPL services must protect against account takeover using layered strategies, such as:

  • Implementing a risk-based, multifactor authentication and verification process.
  • Establishing appropriate limits and adding real-time account freeze capabilities.
  • Collecting and analyzing information like user device data, geolocation and time of day in concert with other authentication factors.
  • Applying machine learning (ML) models to event and transactional data to ensure accurate anomaly detection.

On the merchant side, retailers should take a keen interest in their BNPL providers’ antifraud capabilities. Moreover, they should augment them with their own automated fraud detection tools as an added layer of protection when possible. Optimizing the customer experience is paramount on both sides. Importantly, this includes shielding their mutual customers from online grifters. 

The future of BNPL 

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

Ultimately, a robust antifraud posture can do much more than protect customers and the BNPL platform’s bottom line. In an increasingly crowded space, embedding potent ML/AI models and layered fraud defenses could easily help differentiate a BNPL platform from its competitors.  

As the federal government signals greater regulatory scrutiny and emphasis on consumer protections, each BNPL service provider and retailer has a vested interest in proactively cultivating a trustworthy reputation. What they do in response to growing fraud risks will help shape this industry – and perhaps determine if BNPL survives and thrives or goes the way of layaway.

Thomas French is a senior fraud and security intelligence advisor at SAS


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