Tom-Chris Emewulu
Chargeflow's Digital Evangelist
Table of contents

Buy Now, Pay Later (BNPL) is booming globally but rising chargeback fraud presents significant drawback.

BNPL, a system that allows customers to access ‘instant credit’ at the point of sale, is progressively gaining steam in the industry across various eCommerce verticals. With BNPL, the merchant can still get the money they need, but instead of paying the total amount at the checkout point, customers spread out the cost of an item over installments.

It helps merchants boost their sales and allows customers to alleviate pandemic-induced economic pressures. But not just that. Analysts have noted that the boom in BNPL adoption is because the concept appeals to some virgin market segments. That is, folks who lack access to established credit channels, especially customers in less-developed credit markets, and gen-z/millennial shoppers who are always seeking out credit card alternatives.

How does Buy Now Pay Later work exactly?

It's simple:

  • At the checkout point, the buyer is presented with different payment options.
  • Buyer chooses BNPL.
  • Vendor directs the buyer to the BNPL service provider.
  • The BNPL service provider authenticates the buyer and provides payment options.
  • Buyer selects a BNPL payment option.
  • The BNPL provider pays the merchant.
  • Buyer pays back BNPL in installments to cover the cost of those goods or services.

Win, win, win - service providers make their money by charging a fee to merchants, which is between 2% to 8% of the transaction.

One estimate shows that consumers amassed close to $100 billion from retail purchases with BNPL programs in 2021, a significant rise from $24 billion in 2020 and $20 billion in 2019. Another research found that more than half of all buyers have used a BNPL service at least once - nearly a 50% increase in one year.

But it's not all bliss, as you'll find in the following section.

Customers are adopting the Buy now pay later model
Customers are embracing BNPL

Downsides of offering Buy Now, Pay Later

Aside from the many attractive benefits, BNPL also comes with undeniable risks.

Paying through a BNPL process is unbelievably easy: a seamless checkout experience requiring few clicks, zero processing fees, and instant credit without a cumbersome approval process. Such effortless procedure often creates loopholes for fraudsters to game BNPL systems and services.

By and large, BNPL fraud generally manifests in the following ways:

#1: Fraudulent Chargebacks

The first and most prevalent instance of fraud in BNPL is fraudulent chargebacks. With BNPL fraudulent chargebacks, the perpetrator pays their BNPL debts with a stolen credit card, taking advantage of the feature that allows consumers to settle debts with credit cards. When the actual owner of such a card notices the payment, they force a reversal with a chargeback, and the BNPL provider is left holding the bag.

Another instance of BNPL fraudulent chargebacks is when an opportunistic online shoplifter uses their card to make a transaction and then file a chargeback. That technique is known as friendly fraud. And in each case, for every $1 of a chargeback, the merchant loses at least $3.

#2: Account Takeover Fraud

BNPL providers give every new account a default credit line as part of the process. The lending limit for such statements increases with established indices such as account, transaction frequency, and payment history.

Online shoplifters often capitalize on that default credit principle with synthetic or fake accounts. They equally target existing accounts with phishing, credential stuffing, and SIM card cloning to rip genuine customers off to increase their bounty. 2021 Identity Fraud Study by Javelin Strategy & Research noted that about $13 billion in losses were due to identity fraud, where cybercriminals steal personally identifiable information and use it for their gains.

#3: Abuse of Buy Now Pay Later Process

Many BNPL providers allow buyers to sign up with primary documents, such as proof of identity (e.g., driver’s license) or proof of address (like utility bills).

In many instances, fraudsters use documents obtained from questionable sources, such as stolen mails or data breaches, to create fake accounts that help them bypass fraud and credit checks. For instance, an online shoplifter could provide a phone number from a disposable phone to pass a one-time password requirement, a drop-off address for delivery to avoid traceable addresses and synthetic data for the other identity information.

Flow chart of how buy now, pay later works
How BNPL works

Since the BNPL provider will only consider the person whose data was used in deciding whether they can repay the bill, the fraudster will likely use a virtual card for initial payments or checks and dispose of them before the repayment date. With that, they enjoy the same introductory line of credit offered to actual consumers, with no intention of ever making repayments on the transaction.

How Do You Stop BNPL Fraud effectively?

Some BNPL frauds are hard to crack because providers aren’t always sure how to distinguish when someone lacks the money to make the bill and when they generally don’t intend to make any repayment. Detractors have noted that the Buy Now Pay Later payment option invites payment defaults. For example, consumer protection advocates have been vocal in that it pushes people into debt.

“There is a risk that BNPL schemes may attract people who are already in financial difficulties and may be struggling to make their existing bills and payments.” - Consumer Advocates, vis Forbes.

Service providers must devise preventive and detective security protocols to counter the rising chargeback fraud onslaught and other forms of BNPL fraud. That means, BNPL providers must:

  • Ensure that every information customers provide are legitimate by ascertaining the credibility of phone numbers, emails, addresses, and so on.
  • Consider establishing third-party validation protocols, as such instruments help ensure the name on a transaction matches that of the resident at the delivery and billing location provided. Combining third-party verifications with proof of identity verification at sign-up will help BNPL providers thwart incidental fraud while maintaining a seamless user experience.
  • Use consumer behavior pattern recognition as a reference to intuit chances of fraud. For instance, if a customer has a history of “never pay” fraud incidents or has repeatedly filed chargebacks, chances are they’ll carry that pattern forward. 50% of consumers with a successful chargeback will do it again in less than two months.
Buy now, pay later retail purchase in the US

Summing Up

Establishing standard protocols that move transactions into pe-defined buckets can also be an added safety measure. For example, creating a logic like “reject, accept, or manual review” ensures that questionable transactions aren’t slipping through the cracks. More so, using technology tools such as 3D Secure on high-risk transactions can help BNPL providers limit fraudulent chargebacks.

As BNPL is about cost efficiency, BNPL providers can reduce the associated costs of deploying 3DS by integrating simple validation before moving transactions for 3DS. That helps ensure only potential fraudulent orders are going to 3DS and not every single order.

Those are standard practices that help to stop BNPL fraud.

However, the ultimate gamechanger is to use artificial intelligence and machine learning to excavate uncommon insight from over 50 data points. Such an informed fraud mitigation approach looks beyond the easily spoofed points of origin to track bots and pierce their intent.

Using Chargeflow’s world-first fully automated chargeback framework gives you the most exceptional advantages in that regard. We help you stop chargebacks with ease. And when chargebacks happen, we help you win them with ease. By utilizing Big Data and deep integration with your business, we can produce the most comprehensive chargeback evidence in the world, custom-tailored to your store, and send it on your behalf. Learn more here.


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