Any new payments vector, where hockey stick growth is apparent — up and to the right, of course — grabs the attention of fraudsters.
David Excell, founder and president of Featurespace, told PYMNTS that the explosive growth inherent in buy now, pay later (BNPL) transactions has been prodding bad actors to be especially creative in the ways they try to game the system.
Recent PYMNTS research shows that as many as 50 million consumers have used BNPL options in the last 12 months. The payment option has proven to be especially attractive to younger users, including millennials, who have lately eschewed traditional credit card debt as interest rates rise at a torrid pace.
While there’s always the risk that consumers may over-commit themselves to debt and payments that they cannot easily digest, new risks are on the horizon.
As Excell cautioned PYMNTS, BNPL necessitates taking on a huge amount of data that has to be leveraged in order to make the loans available to consumers. That same data collection can, ultimately, manifest itself in positive top line torque — and increased sales conversions — for the merchants and providers who offer BNPL to their end customers.
‘Looking at All the Edges’
However, fraudsters are “looking at all the edges” to find points of vulnerability and attack.
In fact, as Excell said, “BNPL starts to look a lot like traditional financing and banking — we see a lot of the same fraud mechanisms.”
He pointed to application fraud and account takeover as key conduits to crime itself, as fraudsters can set up installment loans that pilfer goods and services from merchants or bilk the lenders out of the loans themselves, which ultimately have to be written off.
At times, he said, the merchant can also be held liable if there is a security vulnerability inherent in the online storefront itself. The consumer could also be hit by lower credit scores in the future, as installment plans show up on their reports that were taken out in their name, are not being repaid and may have escaped their notice.
Related: Travel and Hospitality BNPL Options Expand as Sector Faces New Enemy — Inflation
The Risks of ‘Collusion Fraud’
There are also other risks in the mix, Excell said. There’s always the risk that overleveraged consumers may not be able to make repayments.
Bit by bit, he said, we’re seeing the rise of “collusion fraud” — where unscrupulous merchants and consumers work together to create online stores to take out and facilitate BNPL loans.
In terms of mechanics, he said, the collusion essentially dupes the BNPL organization into thinking that there’s a legitimate merchant in place shipping goods — in orders that don’t actually materialize.
“If you try a BNPL scheme and you are successful,” Excell said, “you are actually able to monetize that account takeover.” Against that backdrop, he said, there is an incentive for the merchant to make sure they are protecting both their own and their customers’ credentials at the point of payment.
Looking ahead, said Excell, it’s a foregone conclusion that we’ll see BNPL transactions continue to gain in popularity — and that traditional financials instructions will increasing roll out their own offerings.
Open banking, he said, will prove a critical way to get additional data on consumers, verify information and protect them throughout the transaction. Experian, he said, is also launching a BNPL bureau that can help determine creditworthiness and track how individuals use the option over time.
But until then, he said, “Much as we look at the merchant acquiring world, where we need to make sure the merchants themselves are not the fraudsters — we now need to do the same thing for BNPL, as well.”
See also: The CFPB and BNPL: 3 Things to Watch
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