Oksana Balytsky | Source | Director of Product Marketing at Forter

"BNPL is essentially an instant loan application at the point of sale. The quick decision-making that comes with these immediate transactions makes them especially ripe for fraud. In the BNPL sphere, fraud comes down to the identity level. Fraud is occurring at new account creation and account takeovers. According to Forter data, ATO attempts have increased 55% year-over-year with fintech being one of the biggest targets. Ensuring fraudsters are not able to create new accounts or take over legitimate customer accounts at login is becoming more critical.

Another area where fraud is occurring in the BNPL sphere is friendly fraud, also known as chargeback fraud. Behind on their payments or hit with buyer’s remorse, customers may try to exploit chargeback systems, illegitimately recouping costs for items that they don’t return.

Via new account abuse, fraudsters can submit copies of stolen documents (driver’s license, etc.) and have access to a default line of credit that new account holders enjoy. With account takeovers, a fraudster is able to log into a legitimate customer’s account and pay for the purchases using a stolen credit card number from a Dark Web marketplace or a phishing attack. The unknowing consumer whose account has been exploited typically doesn’t know what happened until payment for the purchases is due a few weeks later.

Scammers can also use synthetic identity fraud to paste together pieces of information stolen from real people (a name, a birthday, a social security number) to create a fake identity that they use to buy goods and services through a BNPL provider. The fraudster receives what they “purchased” immediately, with no intention of repaying the loan. Since they created a fake identity to make the purchase, there’s no effective way to track them down.

Sometimes called ‘returns abuse,’ policy abuse happens when a fraudster either returns an item having already used it or returns a different item than was purchased. This happens before full payment is made through BNPL installments, meaning the BNPL provider is on the hook for the full value of the goods.

Card testing fraud is how fraudsters can confirm that stolen card information is usable. The stolen card is initially tested through smaller transactions before being used for larger purchases. As BNPL transactions have a shorter time frame to make credit decisions, card testing fraud could be perpetuated through these purchases.

Refund fraud happens when purchases are made using stolen credit card information, and then refunds are requested to an alternate credit card. A fraudster can often trick e-commerce businesses into issuing such refunds by claiming that their old credit card account is now closed, and therefore, the refund must be put on a new card. This simple yet effective tactic puts businesses in a difficult position.

In general, it is the BNPL provider that’s on the hook for fraudulent losses; however, there may be some gray areas when it comes to service chargebacks and it’d be up to the BNPL provider and merchant to determine how to best handle them.

Data on just how much fraud is happening on BNPL platforms remains scarce as these platforms operate independently of one another. Also, because of the delayed payback structure of BNPL, the full extent of the fraud occurring in this space likely won’t start to become visible for at least another quarter. However, the growing consumer adoption and multiple entry-points for fraudsters means this is a serious concern that should be addressed sooner rather than later. "

“Apple stepping into the ring of the buy now, pay later (BNPL) game with Apple Pay Later is not a surprise. According to LendingTree, the share of American adults who’ve used BNPL services in 2022 has jumped to 43%, 12 points higher than in 2021. Consumers are also racking up a lot of debt with the service, with the total being $52 billion in March — the largest increase on record.
What is most interesting is the shift from BNPL only being used for luxury items such as electronics or furniture to now being adopted for smaller items such as groceries and similar necessities. The quick decision-making that comes with many of these transactions unfortunately makes them especially ripe for fraud. Scammers run less risk by abusing these systems which provides them with the ability to easily access goods or services and leads to an inevitable increase in chargebacks and lost revenue for the retailer.
Though BNPL solutions come with risks surrounding regulation, fraud challenges, and data privacy, BNPL provides an efficient, simple, user-friendly way for consumers to make luxury/large purchases and grocery runs. To prevent rampant fraud, it is essential to understand the security gaps in BNPL platforms. Soft credit checks are a popular solution, but they commonly fail to pick up misspelled names, phone numbers, or compromised accounts through phishing attacks.

I am sure Apple will not be the only company in Big Tech to roll out a BNPL solution. It will become critical for retailers to invest in modern fraud solutions that leverage complete automation and real-time decisioning rather than rules-based detection to rapidly respond to fraudulent transactions so that retailers don’t end up losing out.”