Buy Now, Pay Later: affordability and avoiding fraud

Buy Now, Pay Later (BNPL) services are increasing and ever more popular with consumers – especially young consumers – and the appeal of paying in instalments is projected to grow not just for big-ticket items but for low-cost everyday purchases too.

“Worldpay predicts BNPL will account for 5.3% of global transactions or approximately $438bn in purchases by 2025.”

The rise of BNPL looks set to make this the world's fastest-growing payment method between 2021 and 2025, according to Worldpay's 2022 Global Payments Report. Worldpay predicts BNPL will account for 5.3% of global transactions or approximately $438bn in purchases by 2025.

How does Buy Now, Pay Later work?

BNPL services give consumers the chance to split payments to retailers, spreading the cost of purchases over a short period, ostensibly without having to pay interest or fees. Goods can be received immediately and the financial impact can be handled in smaller, more manageable weekly or monthly payments.

This flexibility of a quick credit agreement and purchase process can be a great benefit to many consumers, especially in a high-inflation economy.

Avoiding future financial trouble

A significant concern has been identified by lender Creditspring in a UK survey, however. One-in-seven consumers don’t realise that BNPL is a form of borrowing (14%) and over half (53%) don’t realise that debt can pile up if payments are missed or are aware that late payment fees can be imposed leading to debt.

“Affordability checks are one way to protect unwary shoppers and potentially vulnerable consumers from overextending themselves and getting into debt.”

In a still largely unregulated industry, these are warning signs of future financial trouble. Good BNPL service providers recognise that affordability checks are one way to help protect unwary shoppers and potentially vulnerable consumers from overextending themselves and getting into debt.

There are several affordability checks to choose from:

• Geo affordability checks

Statistical data analysis layering local information on the frequency of judicial debt judgments and debt collection, local property values and other economic indicators such as unemployment levels in the area.

• Consumer affordability checks

Individual consumer checks for recent debt, bankruptcy or other derogatory financial indicators that point to the possibility of problems with affordability and struggle with payments.

• Open Banking checks

BNPL providers can also leverage Open Banking data, with customer permission, to assess affordability at application, however, this may slow down onboarding and raise consumer trust issues for small transactions.

Such checks can produce a red, amber or green result based on the service provider’s own risk-based approach at the point of application.

Buy Now, Pay Later and fraud

Sadly, as is ever the case with the digital economy, the growth in popularity of this flexible payment is proving to be a popular target for fraudsters.

Juniper Research has estimated online payment fraud losses from 2021 to 2025 will amount to a cumulative $206 billion. A high risk for BNPL services and the fastest-growing financial crime in the United States according to the Federal Reserve, synthetic identity fraud costs the US banks billions each year.

GBG’s The State of Digital Identity 2022 report has revealed the alarming rate that young adults, by far the biggest consumers of BNPL services, are being targeted by identity fraudsters.

“Nearly one in eight (13%) people aged 18 to 24 across Europe have been victims of fraud in the past 12 months.”

The State of Digital Identity 2022

How Buy Now, Pay Later fraudsters operate

Using a combination of techniques, fraudsters are taking advantage of the soft, user-friendly identity checks often used in BNPL application processes to create fictitious accounts and commit financial crimes.

Here are a few of the most common types of fraud:

• New account fraud

Criminals create a new BNPL account using stolen identity data from documents such as driver's licence or utility bill, accessing the introductory line of credit offered to all new legitimate customers.

• Synthetic identity fraud

Criminals use a combination of real and fake personal information, such as identity numbers, names, addresses and phone numbers to create a fake identity and credit profile, enabling them to set up a BNPL account.

• Social engineering

Criminals take over a legitimate, existing account using the victim’s login credentials stolen through phishing, SIM swapping and other data breaches before going on an illegal shopping spree.

• Credit card fraud

Criminals use stolen credit card information to settle payments made on false BNPL accounts, leaving the merchants liable for these costs.

• Chargeback fraud

Criminals make a purchase using a Buy Now, Pay Later, receive the goods or service, then falsely claim to have not initiated the transaction, requesting a refund from the merchant or the bank.

Victims of identity fraud can experience far-reaching consequences. A stolen identity or credit card can leave a negative credit history that costs considerable time and trouble to correct – trouble that young BNPL consumers with a thin, authentic credit file of their own do not need.

Retailers often bear the immediate financial burden caused by BNPL fraud, however, the BNPL service provider can suffer long-term reputational damage, loss of trust and brand value, negatively impacting their business bottom line.

Using Mobile Intelligence to combat Buy Now, Pay Later fraud

Happily, there are solutions at hand for BNPL service providers to achieve trusted real-time customer identity verification and authentication, highlighting potential fraud or scams without putting people off.

With more Gen Z consumers owning a mobile phone than a driving licence, the key to secure digital identity verification is mobile data. Mobile Intelligence provides real-time BNPL fraud signals before money has changed hands.

Fast, simple API-based Mobile Intelligence solutions deliver mobile operator data signals into live BNPL service applications for trusted identity checks.

These Mobile Intelligence checks include:

• Mobile-to-Person match

This solution matches the name, address and date of birth of the prospective BNPL customer to the information held by their mobile operator, validating the data of the device owner.

• Number verification check

This solution silently verifies that a prospective BNPL customer is in possession of their mobile device at the time of a transaction, alerting the provider to possible theft or compromise.

• Number allocation check

This solution checks that the mobile number is valid, active and registered to a known mobile operator, not compromised, lost or stolen or being spoofed from a VOIP service.

• SIM swap check

This solution receives the date and time of the last occasion the SIM card was changed on the prospective BNPL customer’s mobile account, alerting the provider to possible fraud.

• Call forward check

This solution sends a notification if the mobile account currently has forwarding set to direct inbound calls or messages to another number, potentially allowing a fraudster to intercept 2FA requests.

By combining these Mobile Intelligence signals, BNPL service providers can create a trusted customer profile, combining user identity, device status and behaviour that prevents fraud without limiting legitimate sales.

It’s clear that the flexibility and speed of low-cost or interest-free Buy Now, Pay Later services will continue to grow in popularity with consumers, especially as the rising cost of living brings new interest in alternative credit options. And wherever digital consumers go, the fraudsters will be sure to follow.

Responsible BNPL service providers must protect vulnerable consumers from over-extending and should be vigilant for identity fraudsters attracted to a fast-growing financial service.