As the pandemic accelerated the shift to electronic payment methods and online shopping, the popularity of Buy Now Pay Later has continued to gain strong traction in Australia. In fact, the value of BNPL transactions in Australia grew by around 55 percent between 2019 and 2020 and tripled over the previous two financial years.
BNPL, a type of short-term financing that allows consumers to make purchases and pay for them at a future date – very often with no interest – first offered differentiation as merchants competed for customers. It is now an essential payment option with 65% of Australian millennials, 51% of Gen Z, and 45% Gen X having at least one BNPL account.
However, with any new payment trend comes new surfaces where fraud and abuse can take place. In many instances, BNPL is essentially an instant loan application at the point of sale – sometimes with and sometimes without the benefit of a credit check. BNPL providers must make credit decisions in the time it takes for a customer to make a transaction, and this short time frame provides an opportunity for fraudsters to access tangible goods with a lower likelihood of initial detection.
When it comes to BNPL transactions, merchants face various risks:
- ‘Buy now, pay never’: This occurs when someone uses his or her own identity data in combination with stolen or fake data to pass through both fraud and credit checks with no intention of making any of the BNPL repayments after purchase. The fraudster provides as little data as possible and only offers personal details that cannot be traced – such as giving a phone number from a prepaid or disposable phone to pass a one-time password check, or a fake delivery address.
- Policy abuse: Sometimes called ‘returns abuse’, policy abuse happens when a fraudster either returns an item having already worn or used it, or returns a different item from the one that was originally purchased. This happens before full payment is made through BNPL installments, meaning that the BNPL provider is on the hook for the full value of the goods
- Card testing: Card testing fraud is how a fraudster can confirm that stolen card information is usable. The stolen card is initially tested through smaller transactions before it is used for larger purchases. Essentially, stolen card and stolen card holder information is employed to make purchases look like legitimate transactions made by a verified customer.
- Refund fraud: Refund fraud happens when purchases are made using stolen credit card information and then refunds are requested to an alternate credit card. A fraudster can often trick e-commerce merchants into issuing such refunds by claiming that his or her old credit card account is now closed and therefore the refund must be put on a new card. This is a fairly simple, yet effective tactic that puts merchants in a difficult position.
- Chargebacks: Chargeback fraud occurs when a customer makes a purchase and later disputes it with their credit card company, resulting in a chargeback. In some instances, the customer legitimately did not recognize the purchase on their credit card, resulting in “friendly fraud”. In other cases, the customer blatantly attempts to circumvent and abuse company policies to either get money back or keep products for free. Chargebacks lead to many different costs to the company, including lost merchandise, chargeback fees, and even shipping costs.
- Account takeover: Account takeover is the gravest and most serious type of fraud on this list as it is essentially a type of identity theft. A fraudster may use phishing tactics to extract personal information, or steal passwords and security codes. He or she then gains access to legitimate customer accounts on an e-commerce website using the stolen information. Very often, account information is immediately changed after gaining access. The fraudster can then make multiple purchases and even withdraw funds from these accounts depending on the type of website he or she has gained access to.
Account takeover can have an extremely negative impact on the reputation of affected merchants and can seriously jeopardize their relationship with customers. Customers may feel that their personal and financial data is vulnerable and be unwilling to use the eCommerce website again.
Naturally, fraud negatively impacts genuine customers and their retail experience. Genuine customers may end up being mistaken for fraudsters and be blocked from making purchases.
Merchants looking to protect themselves against fraud may also increase prices to cover for losses or implement more stringent policies resulting in customers losing out on more flexible returns or payment options.
From the merchants’ point of view, fraud prevention often represents a hurdle in offering good customer experiences, since it usually involves delays and friction. Some fraud prevention solutions may be effective in preventing fraudulent BNPL accounts from being created, but they can also make it difficult for legitimate customers to sign up. In other words, overly effective fraud protection can mean needless friction for genuine customers.
It is crucial for merchants to strike a balance between good service and revenue risks. To do this, merchants need effective fraud detection that also allows them to maximize conversions of trustworthy customers, and optimize experiences across the entire customer journey. They need fraud protection solutions that offer accurate decisions on customer trustworthiness in real time.
Fraud detection needs to be automated and data-driven in today’s digital economy. Merchants will do well by opting for a fraud protection solution that is built on a wide global network – an ecosystem of retail businesses, banks and payment processors. This allows for effective and precise identification of fraudsters and repeat policy abusers. In the long run, automation allows merchants to scale with confidence as they add to their offerings or services, or expand their business across borders.
Successful merchants will be the ones that adopt an effective fraud protection strategy so that they can focus on business fundamentals: Maximising conversions, delivering great customer experiences, and growing their businesses with confidence.
Matt Humphries is country manager for Australia & New Zealand at Forter.