Buyers now have endless options when it comes to credit.
Many are drawn to the flexibility of buy now, pay later (BNPL) services, which have exploded in popularity during the pandemic.
More than 17 million UK customers have now used the payment option, which gives consumers the choice to pay for goods when it suits them, with no interest or fees, provided they pay what they owe on time. .
However, this is not without risk: BNPL is an irresistible lure for consumers and fraudsters alike. Fraudsters are now finding more and more clever ways to exploit this innovative form of financing, opening up new avenues for cybercrime to go unnoticed.
Change their arm?
According to the FCA, over £2.7 billion was spent using BNPL in the UK in 2020 alone. With such widespread use of instant loans like BNPL, the potential for loss was always going to be high.
Some BNPL users have no intention of paying their debts, walking away with goods in their baskets without paying a penny – known as ‘friendly fraud’.
A study by Cifas has found that one in seven UK adults have confessed to one or more types of first-party fraud, highlighting how many of them have no intention of repaying their instant loan.
This is becoming a major issue as the UK suffers the financial repercussions of COVID-19. With job losses, rising taxes and falling income affecting most sections of society, cash strapped people are trying to get away with more and more first party fraud to fund their expenses.
As credit cards and personal loans are much more heavily regulated and restricted by banks, it is easier for consumers to finance their expenses with BNPL.
Imposters on the Rise
The BNPL also attracts third-party fraudsters – or “malicious actors” – who take advantage of the BNPL for account takeover (ATO) fraud, taking over an account to pose as a real customer. There has been a sharp increase in account takeover attempts in recent years, with a 27% increase in 2020 alone, as the use of online shopping has increased during the pandemic.
Cybercriminals exploit stolen login credentials to hijack BNPL-enabled accounts. They can steal people’s proof of identity and create fake accounts based on that stolen data, leaving the unsuspecting victim to foot the bill. Fraudsters can also hijack genuine customer accounts, allowing them to make unauthorized purchases and steal personal data.
It is easy for cases like this to go unnoticed, as there are often loopholes in the account opening process for BNPL loans. Many companies do not perform formal credit checks at sign-up, instead relying on internal algorithms to determine creditworthiness based on available data. BNPL providers who do not perform a formal review of an individual’s credit status risk attracting fraudsters to their platform. These bad actors are driven by lack of verification and without better protections in place, the problem will only get worse.
Fight against fraud with data-centric solutions
While the fight against BNPL fraud is far from easy, anti-fraud solutions based on machine learning and shared global intelligence can help. By analyzing thousands of data points such as age, location, and shopping habits, these solutions help determine the likelihood of a transaction being fraudulent. By authenticating users behind the scenes using machine learning, BNPL providers are able to continue to deliver a smooth user experience to legitimate customers.
To minimize the risk of ATO, companies can also opt for biometric facial detection capabilities to enroll new account holders and verify that they are who they say they are. With this added layer of protection, fraudsters will not be able to open new BNPL accounts with stolen or synthetic identity data.
With first-party fraud, the lines are a bit more blurred. Some merchants and card issuers are reluctant to accuse customers of lying and therefore prefer to write off lower value transactions. But, in the face of more regulation this year, tackling “friendly fraud” is key to helping BNPL providers protect their bottom line.
Data-centric fraud solutions help by providing the foresight to know if a customer has previously failed to pay for their items or missed payments, allowing the BNPL provider to assess whether to proceed with the transaction.
Safer selling solutions
BNPL’s flexibility and convenience have led to tremendous growth in recent years, but with it comes an upsurge in fraud. Strengthening fraud protections is crucial at a time when customers are racking up unprecedented levels of debt using BNPL, fraudsters are exploiting the payment option and organizations are facing huge losses as a result.
To combat growing fraud, organizations must now adopt smart, data-driven technologies to help root out fraud before it happens – or risk “buy now, never pay” becoming the norm.