By Karisse Hendrick, Principal, Chargelytics Consulting
Buy Now, Pay Later (BNPL) options have become popular both on e-commerce checkout pages and with shoppers. While the exact process for consumers utilizing these payment methods vary by provider, the appeal of paying for purchases across a few fixed payments, often without interest, is especially appealing to younger millennials and “Generation Z” consumers, ages 18-32. The appeal for merchants is a combination of expanding their customer base, reducing shopping cart abandonment rates, and increasing average order values (AOV).
With dozens of BNPL providers competing for both sides of the market in different geographic areas, merchants all over the world have decided—or soon will—which BNPL provider to select for their business and customers. These decisions must factor in geographic reach of the provider, the consumer profiles that use each type of service, and the size of portfolio of other e-commerce merchants the BNPL provider works with. Merchants should also consider how BNPL can affect risk.
One of the biggest risks of accepting payments online for goods or services is the fraud risk liability on CNP transactions. When a merchant is directly accepting credit cards on its site, it takes full liability when fraudulent orders are fulfilled and result in chargebacks. Making predictive risk decisions based on order behavior and customer details is dependent on data from the transaction. In some cases, a BNPL provider owns a significant portion of the customer data since they are essentially guaranteeing payment for these customers. When a merchant does not see all the data for a consumer, and when the payment from the customer for the service occurs over a few installments to a third party, versus a one-time payment prior to shipment made directly to the online merchant, it is more challenging to assess the risk of a transaction. (Not all BNPL service providers retain all customer data, and in some cases, the merchant is still the “merchant of record” for installments; contract terms vary based on provider, brand and size of each merchant, etc.).
When BNPL providers offer “zero fraud chargeback” liability to their merchant partners, this benefit is attractive to online companies. Looking at the history of new payment methods in e-commerce, it becomes apparent that as their popularity rises with legitimate consumers, online fraudsters will also seek to benefit. The risk exposure of specific BNPL providers varies by company, and depends on the company’s attitude towards risk, the experience of the people implementing the fraud prevention strategy, selecting the tools and systems to implement, and overall Know Your Customer (KYC) practices.
How Fraudsters are Attacking BNPL
It would be easy for an online merchant to assume that when their BNPL partner accepts all fraud chargeback liability, this would be a no-risk decision. And for the initial orders placed by customers utilizing BNPL payment methods, this is true. However, some large e-commerce merchants that have been early adopters of BNPL have started to report a new method being used by cybercriminals to circumvent fraud prevention systems and processes.
Here’s how this works:
A fraudster places a fairly low-dollar order on the merchant’s website using a BNPL method. Because most of them have a relatively low dollar threshold for first-time purchases, it’s approved by the BNPL. And, because the merchant does not carry fraud liability on orders being paid for via the BNPL, the merchant’s fraud system auto-passes the order, without going through traditional screenings. After several days, the fraudster logs in to their new account at the merchant’s website and places a high-dollar order on a stolen credit card. Because most fraud screening systems don’t attribute risk to orders placed on an account with “previous good orders,” many merchant fraud systems are passing these orders because the previous purchase, using the BNPL payment method was previously approved. Thirty to 60 days after the high-dollar credit card order is approved, and the merchandise has been shipped to the fraudster, the merchant receives a chargeback.
This example is not meant to discourage any company from accepting BNPL payment methods. This is still a new trend mostly being seen by large e-commerce companies with high-dollar, often name-brand items. Additionally, this is not being reported about all BNPL payment companies—only a small few with operations in the U.S. But we felt it was important to spread awareness that companies are seeing BNPL payment methods being used as a “side door” for fraud. This is a perfect example of fraudsters always finding a path of least resistance.
Should your company be considering a BNPL provider that offers zero-fraud liability, consider implementing a process to still run all orders with that payment method through the same fraud screening system all other payment methods are run through. Or, you may consider speaking to your third-party fraud provider to determine if you can selectively remove the “previous good orders” qualifier on any previous purchases on a specific payment method.
It is worth noting that merchants experiencing these fraud issues still see great value in accepting BNPL as a payment method. They do see a new generation of customers coming to their websites for the first time because they accept these payment methods, and often the AOV on their purchases are higher. The ROI is positive, despite the fraud that bypassed their systems. And most, if not all, were able to implement a fix once they researched the high-dollar fraud reason code chargebacks.