How Do “Buy Now, Pay Later” Options Impact Fraud & Chargebacks?
“Buy now, pay later,” commonly abbreviated to BNPL, is perhaps the hottest topic in payments right now. With so much talk surrounding this new payment option, you might be wondering how it works—more specifically, how it fits into the larger payments ecosystem. For instance, how do you manage buy now, pay later fraud? Are there unique risks associated with BNPL fraud and chargebacks?
In this post, we’ll take a quick look at the ins and outs of BNPL commerce. We’ll also examine the risk posed by fraud and chargebacks, and run through everything you need to know to protect against abuse.
How Does Buy Now, Pay Later Work?
To offer a buy now, pay later option to your customers, you first have to partner with a service provider. There are numerous companies out there offering BNPL support to merchants including Klarna, Afterpay, and Affirm (just to name a few).
You can think of the process as a part-layaway plan, part-credit purchase. The buyers receive their goods at the time of purchase, and you receive the transaction funds once the transaction is processed. The buyers then pay the BNPL service provider in installments to cover the cost of those goods.
When BNPL works properly, it’s a win-win for everyone. As a merchant, you expand your market to include those consumers unable to pay full price upfront. Customers, on the other hand, get a convenient way to pay for their purchases over time. For their part, service providers make their money by charging a fee to the merchants, typically between 2-8% of the transaction. This is not unlike the interchange fees you already pay to process credit card transactions.
Considering all the benefits, it’s no surprise that interest in BNLP is booming. Data published in July 2021 found that more than half of all consumers have used a BNPL option at least once (nearly a 50% increase in just one year).
And BNPL’s share of the global eCommerce market continues to grow, particularly among certain groups. Research shows that Millennial and Gen-Z consumers were willing to spend 44% and 72% more, respectively when BNPL is offered, as compared to other purchasing options like credit cards.
This comes at a cost, however, as this type of payment option invites various types of BNPL fraud.
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Advantages of BNPL Purchasing
This all sounds too good to be true, and in the payments space, that usually means it is too good to be true. So, are there any drawbacks with buy now, pay later options? What about the threat posed by BNPL fraud?
Let’s get this out of the way first: there’s no such thing as a “buy now, pay later chargeback.” At least not in the conventional sense.
Chargebacks are a process unique to the payment card space. In a BNPL transaction, though, the service provider pays you directly. Given that BNPL transactions aren’t conventional card payments, that means that the chargeback process does not apply. Any customer disputes involving a BNPL arrangement must be conducted through the bank and the service provider, rather than the merchant.
The customer is required to agree to the terms of the BNPL arrangement at the time of purchase. So, the only plausible claim a customer could make is that to those terms, or that one party didn’t live up to the contract. This offers you an additional layer of fraud protection.
Of course, that’s not to say buy now, pay later operations are totally without risk. You could still find yourself on the wrong side of a customer claim.
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Is Buy Now, Pay Later Fraud a Threat?
To conduct a BNPL transaction, a consumer must typically create an account with the payment service provider (PSP) in question. This opens the door for several scenarios that could fall under the umbrella of buy now, pay later fraud:
By using account takeover tactics to compromise a user’s account, bad actors are able to engage in BNPL fraud on any site that accepts that provider. Because payment is delayed, the actual consumer may not notice the fraud for weeks.
Fraudsters can use stolen information to engage in synthetic buy now, pay later fraud. This adaptation of synthetic fraud means that the fraudster literally “invents” a fake persona that can be used to create a new account and complete purchases.
This occurs when a relative of the authorized buyer has access to the account. A child, for instance, can make an unauthorized purchase on a parent’s device, which the parent only discovers later.
The good news is that most providers will accept the liability for BNPL fraud that occurs on their platforms. After all, it was their account that was compromised. However, cardholders still tend to draw close associations between merchants and fraudulent transactions. Even if it wasn’t your fault, the buyer will likely attribute the fraud to you, rather than the PSP. This can cause reputational damage, and will make buyers unlikely to shop with you in the future.
Signs of BNPL Fraud
It’s in your best interest to screen BNPL orders for potential fraud. The best indicators are tied to customer behavior. Below are some examples of likely BNPL fraud indicators:
Has the customer ever shopped with you before? Or, is it a totally new customer intent on making a purchase for the first time?
Unusual Purchasing Patterns
For returning customers, does their current purchase reflect their past behavior? In other words, is this purchase unusual for that individual user?
(Place the sentence Line here)Customers typically shop from a small cluster of personal devices. An unfamiliar device may suggest an unauthorized buyer.
Did a buyer submit numerous transactions in a short period? It may be a fraudster attempting to get as much value as possible before being discovered.
Does the shipping address match what’s on file for the buyer? Or could you be shipping goods to a criminal?
None of these indicators are “proof” of buy now, pay later fraud. However, if a customer trips multiple indicators, it may be a good idea to reach out and try to verify the individual’s identity.
Another Threat to Consider: Return Fraud
Remember: criminal activity isn’t the only form of abuse you need to watch for.
In conventional eCommerce, limitations on a cardholder’s available funds or credit can sometimes provide a valuable check against overspending. With BNPL, a buyer may feel less restricted by the amount of money they have on hand…at least at the time of purchase. Once the buyer begins making those monthly recurring payments, however, they could start to feel that they spent more than they could afford.
Buyer’s remorse is one of the leading causes of chargebacks in card-not-present eCommerce. It also causes a significant amount of return fraud.
You can guard against this threat by being clear and up-front about all terms and policies. Customers should be required to verify that they’ve read and agreed to all this information, and that they were informed of how the BNPL process works before purchasing. You can’t prevent customers from abusing the refund process. That said, you can ensure that customers take the time to properly consider their purchase without necessarily contributing to excessive transaction friction.
Know the Terms
Here’s the bottom line: embracing buy now, pay later options can be a great option for both consumers and merchants. But, even though the potential for buy now, pay later fraud is minimal…it’s still a concern.
We recommend carefully reviewing service providers’ policies regarding fraud liability and other concerns outlined above. Although the chargeback process doesn’t apply in these transactions, the degree of liability imposed on you could be impacted by the terms you agree to.
Do your research. Protect your business.
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