BNPL Fraud — “Buy Now, Pay Later” Fraud Risks Explained
A slew of new payment options has emerged in the last few decades. Popular payment systems like PayPal, Apple Pay, Venmo, and many others make it easy to send money between friends. Buy Now Pay Later (BNPL) is an increasingly popular way to pay for online purchases, even though BNPL is an age-old practice. It is nothing more than a marketing ploy for an installment program.
This type of transaction dates back to 1876. Installment plans have been around for over 145 years old and could be much longer because we don’t know when this practice started. BNPL service providers pay merchants upfront, then recoup their money from the customer over time. In this way, merchants can offer a more convenient way of paying in installments without taking on any risks.
Despite its very attractive and convenient nature, you would be surprised if some people take advantage of it. There has been an increasing number of fraud cases with BNPL and we will be talking about them in this article.
How BNPL Services Work
At checkout, customers are given the option of using a third-party BNPL provider. They are then refunded in full when they complete their purchase. After that, the customer is responsible for making a series of payments to the BNPL service provider. It’s up to the customer whether they want a set number of installments or the flexibility to choose their own installment plan. Most plans have monthly payments of between three and twelve months. If customers fail to make their installment payments on time, they will be assessed late fees and their payment history may be reported to credit bureaus.
Payment is made to the merchant in full when the loan is approved and created. Most BNPL providers use a “soft pull” of a customer’s credit history that does not affect their credit score during the application process. The providers can also choose from a variety of other options, including Credit card issuers and some service providers which offer customers BNPL plans with fixed repayment schedules or lower interest rates than those offered by the credit card itself, depending on the terms of the agreement.
There are two main types of plans that merchants looking for a BNPL solution from a third-party provider may encounter, the first being the Merchant Transaction Fee Loans, and the other is Shopper Interest Loan. A loan is given to the customer at the time of the transaction with merchant transaction fee loans. As long as the customer pays their bills on time, they won’t be charged any interest. Rather, a transaction fee is levied upon the merchant.
In most cases, merchants pay between 2% and 8% of the purchase price to the BNPL provider, and in some cases, a small per-transaction fee. Merchants who want to use the BNPL provider’s services would normally go through a registration process. They will set up an account and also submit their business details. BNPL services are a great way to bring more customers and encourage purchases. It is a solution to get them to buy even at interest-free installment plans.
There are many advantages to BNPL services for merchants who sell expensive goods or services because the option to pay nothing upfront helps to retain customers who might otherwise be turned off by the high price tag. While the merchant is not charged any fees, the customer is responsible for paying interest as part of their payment plan. For merchants, this makes BNPL a very attractive option, but less appealing to their customers.
What Kind of BNPL Fraud Is Out There?
The most common type of fraud involving BNPL transactions is account takeover. This means that any online retailer that accepts BNPL provider credentials can be used to make purchases on behalf of the victim if the fraudster can obtain the victim’s login credentials. There is a chance that the victim may not even know they have been targeted until it is too late.
For merchants, the good news is that most BNPL providers take financial responsibility for fraud when incidents like this occur. It’s in the best interest of the merchant to sort through customers’ orders that carry strong fraudulent indicators. They can watch out for activities like:
- New devices or IP addresses attempting to log in.
- When there are many transactions in a short amount of time.
- Re-addressing the shipping location.
- When they notice a brand-new pattern of purchasing.
Customers whose transactions show suspicious activities should be contacted by merchants to verify that they intended to place the order. It is possible to use automated anti-fraud tools, but don’t rely solely on these tools because they tend to give false positives. Even if you try to verify the suspicious flagging it might make your customers feel alienated.
BNPL services have thrived because of economic downturns, a lack of trust in credit cards and big banks, and an increased awareness of the dangers of consumer debt. Their sudden rise to fame may worry some people. Even though BNPL installments don’t accrue the same high-interest rates as credit cards, customers can easily overextend themselves and end up defaulting on snowballing payments despite the lower interest rates. For one thing, many BNPL models may not be financially sustainable in the long term. This means that the terms and costs of such plans may need to change in the near future, especially as major credit card issuers’ entry into BNPL increases the pressure on smaller, specialized platforms.
BNPL companies, like many new businesses, are likely operating at a loss at the moment, with the goal of gaining market share before shifting their focus to profitability. Some of these companies are likely to begin charging higher fees or interest rates as the industry matures. Some merchants might see this as a short-term solution, but it also means that now is the best time to take advantage of these services before the cost of the service increases.
Cross-border payments raise additional questions about the relationship between BNPL and currency exchange rates. Customer and merchant’s currency exchange rates may fluctuate over the course of an installment plan. Customers and/or merchants should be informed in advance if significant changes in exchange rates will be required to be compensated. For the time being, it appears that the BNPL provider will bear the costs and benefits of both beneficial and detrimental changes. However, merchants must verify the policies of any BNPL providers they are considering or currently use.
Now that BNPL risks are mitigated, merchants can benefit greatly from the service. They can get more customers to buy even goods that are very expensive and would normally send them off. There will also be more scams and fraud attacks associated with BNPL as it grows older. Anti-fraud news and updates should be kept up to date by merchants in order to avoid being blindsided by evolving cyber threats.
How Do BNPL Services Affect Chargebacks?
Customers in a BNPL transaction are paying the provider, not the merchant, so any chargebacks filed by customers will not affect the merchant at all. Chargebacks can be challenged, but in most cases, customers have agreed to terms and conditions that prohibit them from reversing any payments they’ve already made. In chargeback disputes where the cardholder claims merchant fraud or error, a properly drafted purchase contract can be compelling evidence. It’s important to make sure customers agree to your terms by taking some action, such as checking an agreement box or clicking a link.
Before partnering with a provider, merchants should review the policies on merchant disputes. If a customer has a problem with the quality of the product or service they purchased, most providers will not get involved or attempt to reverse a payment. Merchants may see a higher rate of returns for refunds if they use a BNPL service, but chargebacks are not an issue. Due to the fact that they won’t have to pay anything immediately, some customers may be more likely to make impulse purchases than others. You might ask for a refund when the first installment arrives if you find out you have bought something you cannot pay for.
Even though BNPL services come with a lot of benefits, merchants need to be wary of the fraud risks that can occur. It is important that they monitor suspicious activities when taking orders as some customers may be victims of this cyber threat. There has been an increase in BNPL fraud and the best way to prevent it is by identifying the threat.