Navigating Holiday Fraud: Key Strategies for BNPL Providers

With the holiday season just around the corner, Buy Now Pay Later (BNPL) services are poised to be just as popular as ever. For many still feeling the pinch of economic strain, these services offer a lifeline, allowing shoppers to spread out their expenses without the immediate burden on their wallets. This financial flexibility is especially appealing during the holidays when consumer spending peaks. Notably, on last year's Cyber Monday, BNPL spending in the U.S. saw a dramatic 42% increase from the previous year. This highlights why BNPL services are becoming so popular—and why they’re catching the eye of fraudsters more and more.  

BNPL providers, bearing the liability for fraud losses, must prioritize proactive fraud protection, especially as the landscape becomes more complex. For example, the integration of BNPL services with social media and e-commerce platforms enhances the customer experience but also introduces security challenges, creating opportunities for fraudsters to exploit new vulnerabilities. Additionally, BNPL providers face the critical and ongoing task of striking a balance between protection measures and a seamless customer experience. During the high-risk holiday season, BNPL providers will encounter some of their toughest challenges. Thankfully, there are ways to keep customers safe and operations running smoothly. These include identifying the most common types of BNPL fraud and having a proactive defense system in place to fend off fraudsters. 

Understanding the Risks: BNPL Fraud and Its Implications 

BNPL providers face several types of fraud that pose risks to their operations and customer trust. Account takeover (ATO) fraud is one example, with criminals using stolen credentials to either hijack existing accounts or create new fraudulent ones. Another common attack is synthetic identity fraud, where fraudsters create new identities by mixing real and fake personal information. Not only does this fraud result in financial losses for BNPL providers, but it can also deteriorate trust from both the consumers and partner merchants, which might negatively impact future business. 
 

In fact, a study revealed that 23% of consumers who fell victim to BNPL fraud no longer trust the retailer that offered the financing. Fraud can hit customers hard, too, leading to financial losses or making them more vulnerable to more fraud if their credentials are stolen. This not only harms the customer but also further damages the BNPL provider's or retailer's reputation if their services are linked to this level of personal fraud    

Friendly fraud has become a significant issue in the BNPL sector with Datos Insights predicting a 40% rise in card disputes tied to friendly fraud by 2026. . Friendly fraud happens when customers dispute transactions they authorized, leading to chargebacks and associated fees. Visa estimates that friendly fraud accounts for up to 75% of all chargebacks, illustrating just how big a problem it is. Whether they are accidental chargebacks or legitimate abuse, this type of fraud costs BNPL providers significantly. And although these disputes have been an issue for years, the unique nature of BNPL services brings new complexities as it opens the door for non-repayment fraud.  

All of these challenges get even tougher with the increase in holiday spending, putting BNPL providers at higher risk. Providers need to stay on top of their fraud prevention strategies, using the latest technology to protect their operations, keep customers safe, and maintain strong relationships with their merchant partners.  

Proactive Defense: Strategies for BNPL Providers to Fight Fraud 

As the holiday shopping season ramps up, BNPL providers must remain vigilant against fraud. They should also consider implementing more granular fraud prevention strategies tailored to specific retailer partners. It's critical to note that these strategies must be established before the holiday rush to be truly effective. Launching new protocols too close to peak times can inadvertently introduce new vulnerabilities. 

To build a robust fraud prevention framework, BNPL providers must adopt a comprehensive approach that integrates advanced technologies and strategic planning. Here are three essential strategies that should be a part of any BNPL provider's fraud prevention strategy, particularly as we get ready for a busy holiday shopping season: 

1. Build a Full-Picture Fraud Prevention Strategy with Data and Behavioral Biometrics 

In fraud prevention, having reliable access to the right type of data is crucial. As a first line of defense, BNPL providers should leverage third-party data connectors to access information from data breaches and dark web sources, providing valuable insights into potential fraud risks. It’s also important to employ behavioral biometrics. Technologies like device fingerprinting can identify risky devices and monitor for suspicious user behavior throughout the application and checkout process.

2. Implement Real-Time Data Orchestration and Customized Rules 

It’s not just about having access to the data, it’s integral to ensure that you can effectively orchestrate the data in real time. BNPL providers need a centralized intelligence hub to integrate and efficiently manage data from various sources for a comprehensive understanding of customer behavior. Not all data orchestration is created equal, which is why it’s important to leverage data orchestration technology that can process data and make informed decisions in real-time. This is especially critical in today’s fast-paced world of fraud, where every second counts. This proactive approach helps address fraud as it’s happening. Building on that, providers can enhance these capabilities by integrating rules, risk assessments, and policies to respond rapidly to emerging fraud. Tailoring these detection tools to fit your business's unique needs ensures they perform exceptionally well in identifying and stopping fraud. 

3. Leverage the Power of Unsupervised Machine Learning and Generative AI 

BNPL providers can strengthen their defenses further by adopting advanced technologies such as unsupervised machine learning and generative AI. Unsupervised machine learning is essential for staying ahead of evolving fraud patterns in real-time, enabling rapid detection without adding friction to the customer experience. Generative AI offers additional benefits by automating processes and enhancing efficiencies, allowing fraud teams to focus more on in-depth investigations. By implementing generative AI tools equipped with automated rule tuning, providers can reduce their reliance on manual efforts. This is particularly important during peak periods like holiday seasons when resources are stretched thin, fraud attempts increase, and there is a surge in spending. 

As the holiday shopping season nears, BNPL providers must stay vigilant and proactive in their approach to fraud prevention. By leveraging advanced data sources, implementing real-time data orchestration, and utilizing cutting-edge technologies like unsupervised machine learning and generative AI, BNPL providers can effectively minimize risks. Ultimately, a robust fraud prevention strategy not only protects BNPL providers and their customers but also preserves the trust that’s essential to the continued growth and success of BNPL services.