Buy Now, Pay Later Providers Should Tackle Fraud Now Rather Than Later
Buy Now, Pay Later (BNPL) is an alternative payment method that has proliferated across global markets in recent years. However, while there are many consumers embracing the flexibility and convenience of BNPL, there are also fraudsters who want to make a profit now, and pay never.
Emilio Rocchi, director of market planning at LexisNexis® Risk Solutions, has been following the developments and innovation happening in the payments ecosystem in the last few years, observing the accelerated rise of alternative payment methods and BNPL in particular. In this interview, he explores the fraud challenges that come hand in hand with the growth of BNPL and addresses why BNPL providers should tackle fraud now rather than waiting until later.
Emilio Rocchi, director of market planning at LexisNexis® Risk Solutions, has been following the developments and innovation happening in the payments ecosystem in the last few years, observing the accelerated rise of alternative payment methods and BNPL in particular. In this interview, he explores the fraud challenges that come hand in hand with the growth of BNPL and addresses why BNPL providers should tackle fraud now rather than waiting until later.
Emilio, an increasing number of consumers are using Buy Now, Pay Later. What can you tell us about its rapid rate of adoption?
The use of this new payment method is increasing rapidly around the globe. According to data from the LexisNexis® Digital Identity Network®, in 2021 we saw 367 million BNPL transactions and in 2022, the volume of BNPL transactions went up to 467 million. That represents a 27% percent year-over-year (YoY) growth in the volume of BNPL transactions from 2021 to 2022.
Interestingly, we can see that the majority of the BNPL consumers actually favor mobile over desktop when it comes to paying with BNPL. In 2022, 86% of the BNPL transactions were seen on mobile browsers, 2% were on mobile apps and only 12% were on desktop.
Now, from a macroeconomic perspective, we see that inflation rates are going up globally and many countries are experiencing an increase in the cost of living. So, more and more consumers are likely to turn their attention to BNPL.
Indeed, according to Juniper Research, BNPL payments are expected to account for nearly a quarter of all global ecommerce transactions by 2026.
What do you think is driving the expansion of BNPL? What is it that makes this payment method so appealing?
We can summarize the key benefits of BNPL in giving consumers convenience, accessibility and flexibility and allowing merchants to attract a wider range of consumers.
BNPL appeals to many different demographics including younger generations, such as millennials and Gen Z, tech savvy consumers or consumers with lower income.
Typically, BNPL is an interest-free payment method, so for many consumers it represents a way to avoid traditional debt. Some BNPL schemes require a soft credit check but usually this payment method doesn’t alter a consumer’s credit rating. That makes it convenient and accessible to a segment of consumers who are looking for short-term financing but might not get approved for a loan or might not have access to credit due to financial circumstances, location or other factors.
It also gives consumers flexibility. They can decide to make a purchase today and pay for it over time, after an upfront payment. The full payment could be covered in 12 installments, for example. That means that in between receiving the product and paying the full amount, consumers can decide to return the product.
Deferred payments, what we call now BNPL, have existed for a very long time in the payments ecosystem but were mostly used for higher priced items or higher average order value. With the wider adoption of BNPL, consumers are using this payment method to buy items that are not very high value, what we call micro payments.
Merchants can benefit as well by adopting this payment method. They can attract new consumers by offering more flexible payment options, see more transactions and increase conversion rates. According to a report from PYMNTS, merchants offering BNPL were expected to see cart abandonment rates decrease by nearly 40% in 2020. More so, generally, the BNPL provider assumes the risk if a consumer defaults on a payment, so the merchant is not typically impacted by a loss..
Let’s look at BNPL from a fraud perspective. What are the riskiest points for BNPL providers and their customers?
That's a very good question because all three parties can be affected by fraud: the consumer, the merchant and the BNPL provider.
New account registration with stolen credentials or spoofed identities and account takeover are some of the main types of fraud of which BNPL providers should be cautious. These fraud typologies are not new but certain characteristics specific to BNPL make it more susceptible to these types of fraud. The extended nature of the payment process characteristic of BNPL, for example, provides much more time for fraudsters to conduct their activity unnoticed.
During a new account registration, the fraudster could be using stolen credentials acquired through phishing or data breaches or spoofed identities so this could negatively impact merchants. If the consumer onboarding is done with the BNPL provider, merchants need to make sure that providers take care of all that risk. If not, then the merchants should conduct checks and ensure that individuals adopting this payment method are actually legitimate consumers and not a fraudster who is using stolen credentials.
Another risk is synthetic fraud. In this case the fraudster mixes real information, perhaps compromised in a data breach, with false information to open an account and proceed to choose BNPL to buy a product or a service, which of course will never be paid in full. It may take some time for the provider to realize the damage since no real consumer is the victim.
Account takeover is when a legitimate consumer’s account is compromised. Once the fraudster has control of a legitimate account then they can actually start buying products or services and choose BNPL to commit fraud. In some cases, the fraudulent usage of this payment method may go unnoticed. The consumers may not be aware until they notice a charge and realize their account has been breached and goods have been purchased without their knowledge.
First party fraud can occur when a legitimate consumer purchases a good or a service with BNPL as a payment method without the intention to pay. A variation of this is when legitimate consumers request fraudulent chargebacks.
So BNPL providers and merchants alike need to make sure certain measures are in place to minimize the risk of fraud. Advanced technology, such as machine learning models and behavioral biometrics, can be leveraged to analyze patterns of behavior so providers can start identifying the consumers that are likely to be driving this type of friendly fraud.
What are the risks for merchants doing business with BNPL providers?
This depends on the type of contract that the merchant has with the BNPL provider. If a BNPL provider doesn’t accept liability for the financial cost of fraud when an incident occurs, then either the merchant or the consumers are at risk of incurring the costs.
Merchants should be prepared and have measures in place to prevent different types of fraud such as the usage of synthetic identity and the illegitimate use of credentials to open accounts or make payments with BNPL.
What does the future hold? Should BNPL companies expect to see more regulations being put in place?
In many markets, BNPL providers operate under lighter regulatory constraints than traditional credit products. However, greater regulatory scrutiny is underway:
BNPL providers should be reassured that implementing fraud prevention measures doesn’t need to be synonymous with compromising consumer experience and should consider tackling fraud now rather than later. However, finding the right provider to navigate the complexity and challenges in the fraud management space is essential.
A robust fraud prevention strategy should combine advanced technology, behavioral biometrics analysis and high-quality digital intelligence.
LexisNexis® ThreatMetrix® can help BNPL providers harness intelligence related to devices, locations, identities and past behaviors to confidently distinguish between trusted and fraudulent behavior. ThreatMetrix® is powered by the global LexisNexis® Digital Identity Network®, a crowdsourced intelligence database aggregating billions of global transactions.
Leveraging behavioral biometrics adds an enhanced layer of background fraud protection without negatively impacting customer experience. It can measure and analyze unique behavioral patterns that are incredibly difficult to mimic and help recognize trusted consumers, flag suspicious behaviors and distinguish humans from bots.
LexisNexis® Risk Solutions offers a broad portfolio of fraud and identity solutions that BNPL providers can leverage to mitigate different types of fraud risks across the customer journey - from new account creation and login to account management and payments.
The use of this new payment method is increasing rapidly around the globe. According to data from the LexisNexis® Digital Identity Network®, in 2021 we saw 367 million BNPL transactions and in 2022, the volume of BNPL transactions went up to 467 million. That represents a 27% percent year-over-year (YoY) growth in the volume of BNPL transactions from 2021 to 2022.
Interestingly, we can see that the majority of the BNPL consumers actually favor mobile over desktop when it comes to paying with BNPL. In 2022, 86% of the BNPL transactions were seen on mobile browsers, 2% were on mobile apps and only 12% were on desktop.
Now, from a macroeconomic perspective, we see that inflation rates are going up globally and many countries are experiencing an increase in the cost of living. So, more and more consumers are likely to turn their attention to BNPL.
Indeed, according to Juniper Research, BNPL payments are expected to account for nearly a quarter of all global ecommerce transactions by 2026.
What do you think is driving the expansion of BNPL? What is it that makes this payment method so appealing?
We can summarize the key benefits of BNPL in giving consumers convenience, accessibility and flexibility and allowing merchants to attract a wider range of consumers.
BNPL appeals to many different demographics including younger generations, such as millennials and Gen Z, tech savvy consumers or consumers with lower income.
Typically, BNPL is an interest-free payment method, so for many consumers it represents a way to avoid traditional debt. Some BNPL schemes require a soft credit check but usually this payment method doesn’t alter a consumer’s credit rating. That makes it convenient and accessible to a segment of consumers who are looking for short-term financing but might not get approved for a loan or might not have access to credit due to financial circumstances, location or other factors.
It also gives consumers flexibility. They can decide to make a purchase today and pay for it over time, after an upfront payment. The full payment could be covered in 12 installments, for example. That means that in between receiving the product and paying the full amount, consumers can decide to return the product.
Deferred payments, what we call now BNPL, have existed for a very long time in the payments ecosystem but were mostly used for higher priced items or higher average order value. With the wider adoption of BNPL, consumers are using this payment method to buy items that are not very high value, what we call micro payments.
Merchants can benefit as well by adopting this payment method. They can attract new consumers by offering more flexible payment options, see more transactions and increase conversion rates. According to a report from PYMNTS, merchants offering BNPL were expected to see cart abandonment rates decrease by nearly 40% in 2020. More so, generally, the BNPL provider assumes the risk if a consumer defaults on a payment, so the merchant is not typically impacted by a loss..
Let’s look at BNPL from a fraud perspective. What are the riskiest points for BNPL providers and their customers?
That's a very good question because all three parties can be affected by fraud: the consumer, the merchant and the BNPL provider.
New account registration with stolen credentials or spoofed identities and account takeover are some of the main types of fraud of which BNPL providers should be cautious. These fraud typologies are not new but certain characteristics specific to BNPL make it more susceptible to these types of fraud. The extended nature of the payment process characteristic of BNPL, for example, provides much more time for fraudsters to conduct their activity unnoticed.
During a new account registration, the fraudster could be using stolen credentials acquired through phishing or data breaches or spoofed identities so this could negatively impact merchants. If the consumer onboarding is done with the BNPL provider, merchants need to make sure that providers take care of all that risk. If not, then the merchants should conduct checks and ensure that individuals adopting this payment method are actually legitimate consumers and not a fraudster who is using stolen credentials.
Another risk is synthetic fraud. In this case the fraudster mixes real information, perhaps compromised in a data breach, with false information to open an account and proceed to choose BNPL to buy a product or a service, which of course will never be paid in full. It may take some time for the provider to realize the damage since no real consumer is the victim.
Account takeover is when a legitimate consumer’s account is compromised. Once the fraudster has control of a legitimate account then they can actually start buying products or services and choose BNPL to commit fraud. In some cases, the fraudulent usage of this payment method may go unnoticed. The consumers may not be aware until they notice a charge and realize their account has been breached and goods have been purchased without their knowledge.
First party fraud can occur when a legitimate consumer purchases a good or a service with BNPL as a payment method without the intention to pay. A variation of this is when legitimate consumers request fraudulent chargebacks.
So BNPL providers and merchants alike need to make sure certain measures are in place to minimize the risk of fraud. Advanced technology, such as machine learning models and behavioral biometrics, can be leveraged to analyze patterns of behavior so providers can start identifying the consumers that are likely to be driving this type of friendly fraud.
What are the risks for merchants doing business with BNPL providers?
This depends on the type of contract that the merchant has with the BNPL provider. If a BNPL provider doesn’t accept liability for the financial cost of fraud when an incident occurs, then either the merchant or the consumers are at risk of incurring the costs.
Merchants should be prepared and have measures in place to prevent different types of fraud such as the usage of synthetic identity and the illegitimate use of credentials to open accounts or make payments with BNPL.
What does the future hold? Should BNPL companies expect to see more regulations being put in place?
In many markets, BNPL providers operate under lighter regulatory constraints than traditional credit products. However, greater regulatory scrutiny is underway:
- The European Union has been looking at whether BNPL should fall under the scope of PSD2 with the EU Council deciding to revise the Consumer Credit Directive.
- The U.S. Consumer Financial Protection Bureau has opened an inquiry into BNPL.
- The UK Financial Conduct Authority and HM Treasury have also indicated strengthening the regulation of interest-free Buy Now Pay Later credit agreements and outlined plans to enforce affordability checks.
- The Singapore FinTech Association has launched a BNPL Working Group in order to develop a code of conduct for providers.
- The Hong Kong Monetary Authority (HKMA) announced in its 2022 Work Priorities that it will enhance consumer protection on innovative products, including BNPL products.
BNPL providers should be reassured that implementing fraud prevention measures doesn’t need to be synonymous with compromising consumer experience and should consider tackling fraud now rather than later. However, finding the right provider to navigate the complexity and challenges in the fraud management space is essential.
A robust fraud prevention strategy should combine advanced technology, behavioral biometrics analysis and high-quality digital intelligence.
LexisNexis® ThreatMetrix® can help BNPL providers harness intelligence related to devices, locations, identities and past behaviors to confidently distinguish between trusted and fraudulent behavior. ThreatMetrix® is powered by the global LexisNexis® Digital Identity Network®, a crowdsourced intelligence database aggregating billions of global transactions.
Leveraging behavioral biometrics adds an enhanced layer of background fraud protection without negatively impacting customer experience. It can measure and analyze unique behavioral patterns that are incredibly difficult to mimic and help recognize trusted consumers, flag suspicious behaviors and distinguish humans from bots.
LexisNexis® Risk Solutions offers a broad portfolio of fraud and identity solutions that BNPL providers can leverage to mitigate different types of fraud risks across the customer journey - from new account creation and login to account management and payments.
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