As commerce migrates onto the web, so do longtime procedural staples of the retail space. From “try before you buy” options for online clothing shoppers to layaway-style pre-ordering of goods, many common brick-and-mortar practices are becoming more common online.
However, these old tactics are risky when translated to the Internet and e-commerce. Unlike in-person sales and in-store interactions, anonymity allows malicious actors to take advantage of businesses by whatever means available to them.
Flexible payment options such as “buy now, pay later” plans represent a particularly high-risk approach, since they practically invite fraudsters to nab new products with no intention of paying for them. If you are considering employing a similar sales tactic on the web, carefully consider the risks covered below.
Why BNPL Appeals to Fraudsters
Buy now, pay later (BNPL) payment options make accessing a limited line of credit easy and inexpensive. Unfortunately, this makes for a particularly appealing fraud target.
Fraudsters appreciate three facets of the BNPL process in particular:
- Lengthy repayment periods – Since customers can pay off purchased items at a convenient pace, it’s easy for fraudsters to fool BNPL service providers into thinking they are legitimate customers at first, only to cease payments long before repaying the full value of the purchase.
- Low or no need for credit checks – Without full credit checks, companies offering BNPL services have trouble detecting fraud risks like synthetic identities, which leverage a mixture of stolen information.
- Fast-paced onboarding – BNPL purchases are approved in real-time, leading to higher sales numbers and extreme ease of use. However, this approach helps fraudsters slip through the cracks and score free merchandise they have no intention of paying off.
Types of Fraud Risk for BNPL
Fraud comes in many forms, but a few are especially common for BNPL companies.
- First-party fraud – This type of fraud is also known as friendly fraud. In this case, the person committing fraud is not a professional and simply stops paying off their debt, leaving little recourse for the BNPL company.
- Never-pay fraud – This tactic is especially simple for fraudsters who have stolen payment card details or gained access to a user’s account. They simply make purchases with this pilfered payment information and never pay back what is owed. Worst of all, their victims are the ones left with the bill.
- New account abuse – This form of fraud is as easy to commit as obtaining copies of a person’s driver’s license and opening a new account with a BNPL service provider. Limited Know Your Customer (KYC) checks offer very little resistance for savvy scammers.
Return Fraud Abuse
Return fraud is a particularly troubling trend for e-commerce businesses, as they deal with an elevated number of returns and never interact with customers in person. This form of fraud involves buyers fabricating grounds for a refund or returning an item of significantly less value than what they originally purchased. Naturally, companies offering BNPL are increasingly becoming the targets of these kinds of scams.
Entire industries have sprung up underground to facilitate such behavior, with companies taking a cut of refunds they help fraudsters receive illegitimately. As many as 81% of all chargebacks for purchases reported undelivered or not received were actually found to be a form of buyer abuse. Even though the items had been received, the buyer requested a refund anyway.
Mitigating Return Fraud Risk
Verifying identities is the best place to start in the effort to curb this emerging form of fraud. However, given the nature of the retail industry (especially online), retailers must carry out this process with capable technology. Manual methods of inspecting user information simply can’t effectively scale with the volume of purchases many platforms see on a regular basis.
With Intellicheck, businesses validate the ID of their customers and can use facial biometrics for online transactions. Results are fast and 99.9% accurate. With the ability to validate an ID in under a second, it’s a figure you can actually trust at scale. Request a demo to see firsthand how Intellicheck can help your business fight return fraud.