‘Criminals love buy now, pay later’: How fraudsters exploit popular interest-free payment plans

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  • Experts say fraudulent activity is now on the rise on some of the biggest buy, pay later (BNPL) platforms.
  • Criminals are taking advantage of vulnerabilities in the application process for BNPL loans and stealing items ranging from pizza to video game consoles.
  • BNPL fraud warnings are especially timely as Black Friday kicks off the important holiday shopping season next week.

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London — Buy ​​now, pay later services aren’t just popular with consumers. They are also proving to be targets of criminals.

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According to fraud experts who spoke with Businesshala, fraudulent activity is now on the rise in some of the biggest buy, pay later (BNPL) platforms in the industry, including Klarna, Afterpay and Affirm.

BNPL products let buyers split the cost of their purchase over three or four months, often interest-free. They have become massively popular in the US and Europe, and generated nearly $100 billion in transactions globally in 2020 alone.

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“Criminals like to buy now, pay later,” Martin Rehak, CEO and co-founder of check fraud detection start-up Resistant AI, told Businesshala. “You can already see crime on many levels.”

Experts say criminal gangs are taking advantage of vulnerabilities in the application process for BNPL loans, using clever tactics to try and steal items ranging from pizza and liquor to video game consoles.

One of the weaknesses, says Rehak, is the reliance of BNPL firms on data to approve new customers. Many companies in the industry do not conduct formal credit checks, instead using internal algorithms to determine creditworthiness based on the information available to them.

Retailers working with the BNPL platform “classify things differently,” Rehak said, adding that this could lead to inconsistencies. “There’s always a way to take advantage of this and basically steal from you by using someone else’s fault.”

For example, a participating merchant may run a special promotional event for alcohol but specify a vague category such as “special event”. If the artificial intelligence system doesn’t recognize the category and labels it a more general one with a lower default risk, it runs the risk of fraud through the cracks.

Rehak said many scammers are stealing people’s identities or taking over their accounts to evade identities, forcing unsuspecting victims to pay the bills. He declined to name any specific company being targeted, however, saying that Resistant AI counts several BNPL businesses as customers.

‘Very profitable’

Kevin Goschalk, founder and CEO of US fraud-prevention start-up Archos Labs, said criminals are increasingly targeting BNPL platforms because they have “softer” controls than large banks and credit card companies.

“Fintechs are very attractive because they are generally fast-growing, early-stage companies,” he told Businesshala. “They have far less control than the big banks that have been on the security side for many years, so it makes them a good target.”

Klarna denied claims that its fraud checks and controls were more lax than those of banks, while Afterpay said it has “extensive back-end fraud procedures” to verify new users.

Goschock said scammers in the US are using such services to take advantage of supply shortages. He cited the example of criminals getting PlayStation 5 consoles on BNPL and flipping them online at exorbitant prices to make a profit.

Since BNPL services let users spread their purchases over four equal installments, fraudsters are able to pay only 25% of the base price — about $125 for the PS5 — and avoid paying the rest, said Archos Labs CEO. he said.

Archos Labs says its main customers include financial institutions, tech giants and video game companies. The firm’s clients include Microsoft and PayPal, the latter of which offers its own BNPL product.

Experts say another reason BNPL systems are being targeted is their popularity – it is all too easy to go unnoticed in a sea of ​​others applying for credits.

“If you want to survive in the payments business, you have to grow very quickly,” Rehak said.

According to Rehak, it’s not just individuals who are working to defraud these services. Criminals are also taking the help of others to cheat the system, offering their knowledge of committing fraud on a large scale.

holiday shopping

BNPL fraud warnings are especially timely as Black Friday kicks off the important holiday shopping season next week.

“There’s a huge amount of fraud lurking out there because they always lower their security checks during those incidents because they don’t want it to affect sales,” Gotchock said.

Unlike credit card companies, the bulk of BNPL companies’ revenue comes from merchants. Companies like Klarna and Afterpay charge retailers a small fee on all transactions processed through their platforms.

The major selling point for merchants is that they often see an increase in their sales volume. This has given rise to concerns that BNPL schemes are encouraging consumers to live beyond their means.

Gotchock said retailers are generally happy to accept some level of fraud as a price to do business.

Klarna’s UK head Alex Marsh said the firm conducts “advanced and comprehensive investigations, internally and externally.”

“These comments, based on comments from other BNPL firms, bear no resemblance to Klarna’s business or fraud prevention capabilities,” Marsh said. “Our fraud rate is half that of credit card fraud and we have far more sophisticated technology in our checkout and products than banks and credit card issuers.

“We work more closely with merchants than the average bank or credit card issuer, which means we get a richer level of product data to provide stronger and more dynamic security than older payment methods like credit cards. Is.”

Afterpay said managing fraud was a “top priority” for the company and losses as a result of fraud accounted for less than 1% of its global sales in the last fiscal year.

“Our risk management system is based on market-leading proprietary machine learning algorithms that are continuously adjusted to counter any potential threats,” Rich Baer, ​​UK Country Manager, Clearpay, Afterpay’s international division, told Businesshala .

“Our global risk team is very close to any potential attack or loss abnormality and responds rapidly to keep both our customers and merchants safe at all times.”

The BNPL sector has attracted interest from major corporations, with companies such as PayPal and Square jostling for a role in the space. PayPal began offering its own BNPL facility last year, while Square recently agreed to acquire Afterpay for $29 billion.

Also, the rapid growth of the industry is worrying the regulators. The UK government wants to bring BNPL products under regulatory oversight, and is currently running a consultation to determine how to proceed with its plans.

For their part, BNPL platforms such as Klarna and Afterpay say they would welcome regulation as long as it is “proportionate”.

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