Prevent Buy Now Pay Later Fraud with Transaction AI.

Consumers flock to merchants who offer buy now pay later (BNPL) models to lessen the financial burden of large purchases and to seek an alternative to credit cards. For merchants, the key is to make this process as seamless as possible, since a positive BNPL experience often leads to loyal customers, higher purchase values, and lower shopping cart abandonment rates. However, offering a frictionless experience facilitates buy now pay later fraud.

The buy now pay later phenomenon

More than half of Americans have used BNPL, and the pandemic has accelerated this phenomenon. These small loans are especially popular among millennials.

Consumers turn to split pay and other BNPL products to keep some cash in their pocket in case of emergency, while others simply choose this option so they can spend more on online shopping.

PayPal Credit is a major player in this market, with 57% of BNPL shoppers using this platform. But there are other options like Afterpay, a buy now pay later provider that doesn’t charge interest or fees.

While some BNPL providers connect shoppers with lenders who issue a small loan, others offer solutions that allow merchants to accept installment payments.

Unlike layaways, customers receive their purchases immediately. BNPL is very accessible and transparent since users can review the terms and apply for split pay or another BNPL product as part of the checkout process for instant approval without a hard credit inquiry.

Even though merchants pay a fee for this service, it’s a solution that increases sales, especially for larger purchases. It’s estimated that buy now pay later could represent 4.5% of all e-commerce transactions in North America by 2024.

Why do criminals target merchants who offer BNPL?

The BNPL model is appealing to criminals because they receive the merchandise upfront with no payment or with a payment that represents a fraction of the value of the purchase.

Merchants strive to offer a seamless experience where applying for buy now pay later is part of checkout. By facilitating this process for legitimate customers, merchants are making it easier for criminals to complete fraudulent BNPL applications.

Fraud can occur at different stages of the BNPL model

Mitigating buy now pay later fraud is particularly challenging because there are risks at different stages of this model:

  • Some shoppers are using their own information to apply for BNPL with no intention of making the installment payments. It’s a form of first-party fraud that is difficult to tell apart from bad debt. It’s a common issue, with 20% of all bad debt estimated to be first-party fraud.
  • While some scammers simply fall behind on payments, others commit chargeback fraud to get their initial split payment back. It’s a costly problem since merchants lose an average of $3.48 per dollar from chargeback fees.
  • Due to the seamless application process, BNPL is attracting criminals who use stolen or fake data to commit third-party fraud. Some fraudsters might use a stolen identity or credit card to make a purchase. Others will construct synthetic identities with a combination of data points tied to different real and fake identities.
  • Some criminals bypass the BNPL application process entirely with account takeover fraud. Once they have access to the account of a shopper who is already approved for BNPL, they can change the shipping address and make a fraudulent purchase. More than 50% of organizations have seen account takeovers become more common year to year.

How to mitigate buy now pay later fraud

The service provider or bank that issues the BNPL loan bears the risk, but both merchants and BNPL providers can mitigate risks at every step of this process with a multi-layered approach.

For BNPL providers, a good first step is to review requirements shoppers have to meet to qualify. It’s possible to find a balance between vetting users and offering a seamless experience. Adopting policies to help those who struggle with making their installment payments on time could reduce first-party fraud and bad debt.

Merchants must also take steps to protect themselves from chargebacks. Updating return policies can go a long way in making chargeback schemes more difficult to implement.

Because there is no hard credit inquiry for BNPL, it’s important to also verify identity and intent when a user fills out an application.

With a mix of’s AI-powered solutions like Transaction AI’s identity proofing, verification, and customer behavior analysis, it’s possible to make sure that a user is who they claim to be. With over 8 billion identities for sale on the dark web, identity proofing is a must-have line of defense against synthetic and stolen identities.

Additional layers include using 3DS to have the card issuer verify the identity of the shopper at checkout and link analysis to detect connections to widespread schemes.

How can help protect you from buy now pay later fraud can address risks across the customer journey and help you adopt a multi-layered approach that will make BNPL safer for all parties involved. Here are some of the solutions we offer:

  • ID proofing and authentication. Our solutions review thousands of data points to reveal stolen or synthetic identities and protect you from third-party fraud.
  • Link analysis. We use consortium data collected from our network of merchants to flag malicious agents and track data points connected to the schemes they have used in the past.
  • Machine learning. You can leverage machine learning to assess transactions in real-time for a seamless shopping experience and fewer false positives.
  • Integration. Our solutions support integration with over 70 different APIs so you can develop a customized ecosystem adapted to your needs.

Ready to take action against buy now pay later fraud? Schedule a free demonstration to learn more about our solutions, and download our fact sheet to learn more about Transaction AI.