Now is the time to act on pay later

NOW IS THE TIME TO ACT ON PAY LATER FRAUD

As the buy now, pay later (BNPL) industry booms, so too have incidents of identity theft and payment fraud associated with the payment method.

Recent cases have led to calls for stronger regulatory protections and, in the UK, this is now set to happen, with the Treasury announcing in February 2021 that the sector would be brought within the scope of the Financial Conduct Authority (FCA).

Under its watch, BNPL firms will have to conduct proper affordability checks before lending, as well as applying tougher scrutiny to fraud cases. As such, they will have to quickly find solutions to improve processes and meet the new standards coming into effect.

UNDERSTANDING THE THREAT

Fraudsters have taken advantage of the relatively new BNPL payment process, with account takeover the most prevalent fraud risk for consumers. If a fraudster can obtain the login details for someone’s BNPL provider account, they can log into any e-commerce site that accepts that provider and make purchases from their account. Cases involving this kind of fraud have providers, with consumers entering card details to make purchases. Credit card data, in particular, is frequently targeted by fraudsters, and is a key risk for businesses. Last year, British Airways was fined £20million under the General Data Protection Regulation (GDPR) for a security incident that exposed customers’ card numbers, expiry dates and card verification value (CVV) codes.

As a result, BNPL vendors face a fight on two fronts: identity theft and payment fraud, which require constant monitoring, while regularly adapting security measures to combat increasingly sophisticated fraud.

Michela Toffali,

Head of Marketing for Yolt Technology Services, puts the case for using open banking to counter online crime as the BNPL sector comes under tougher scrutiny

reached national news, with victims having items delivered to their homes that they didn’t order, and unauthorised funds taken from their bank accounts.

Cases of stolen identity can have a significant impact on companies offering BNPL services. If a merchant’s legitimacy isn’t properly confirmed, then we could see fake merchants submitting falsified orders, using stolen customer details to collect payments for products they sold but never shipped. In these cases, the BNPL vendors would likely assume the risk and would be left potentially needing to compensate the consumer and invest time and resource into reporting the fraud and supporting an investigation by the relevant authorities.

BNPL vendors also face the same general security challenges as other payment

HOW THE COSTS RACK UP

The impact that fraudulent transactions can have on businesses and consumers alike is profound in both the short, and long term.

The immediate impact of fraud cases, for businesses, is the financial loss. In the UK alone, the private sector lost around £140billion to fraud in 2017. Fraudulent transaction costs include victim compensation, shipping and insurance, as well as chargeback fees, potentially running into hundreds of pounds per transaction. In some cases, businesses must also replace lost inventory and pay for manual reviews of suspicious transactions.

In the longer term, businesses may also bank balances and income to expenses lose out because of the impact on their and spending habits. brand reputation, with consumers no As a result, AIS is well-placed to help longer confident in dealing with them and businesses and BNPL firms detect cases of investors potentially looking elsewhere. identity fraud in these transactions, while Alongside this, businesses may lose boosting the security measures already in confidence in their own ability to spot place. By running an instant API call through fraudulent transactions, and so opting AIS, businesses can immediately get the to pay more to deploy an external fraud bank account name from a transaction, detection and prevention solution. which has already gone through verification Another potential knock-on effect is the via their bank’s secure authentication. implementation of checkout processes Consequently, AIS can help businesses better that increase friction for consumers and detect and prepare for when a suspicious result in higher rates of abandoned sales, bank account has made a BNPL purchase. further costing the company. PIS can help businesses and BNPL

The impact of fraudulent transactions has been further exacerbated by the Smarter carts: COVID-19 pandemic, with businesses AIS with PIS helps already struggling financially due to the to tackle fraud severe economic downturn. Merchants spend three-to-five per cent of their revenue combatting fraud, which, combined with lower profit margins and shop closures due to the pandemic, means such instances have been more keenly felt, pushing some companies closer to administration or even bankruptcy.

The accelerated shift to online services during the pandemic has also meant companies have had to quickly upgrade their online fraud detection and prevention services, representing another Open significant cost during a difficult time. For businesses that weren’t able to banking has the power vendors tackle payment upgrade, or have chosen not to future-proof fraud in other ways, too. to, the switch to digital has meant it’s been harder for them to detect and prevent the growth of BNPL vendors It allows bank customers to access their accounts directly, to authorise fraudulent transactions, payments, make online further raising costs. purchases, pay bills or transfer money between bank accounts, using secure FINDING THE SOLUTIONS payments systems such as UK Faster With fraud hitting businesses harder Payments or a SEPA (Single Euro Payments than ever, many are looking for solutions Area) transfer. that can provide additional security while Using PIS, BNPL payments are verified reducing their costs. through the bank’s security measures, Open banking-powered services such meaning the consumer doesn’t have as payment initiation services (PIS) and to enter sensitive account or credit account information services (AIS) are card information on the merchant’s becoming increasingly popular options, and website. As a result, there’s an additional both are able to combat identity theft and layer of security for the consumer during payment fraud within BNPL transactions. the payment process, and the business

AIS gives businesses instant access, can feel more confident about their fraud with consent, to customers’ transaction detection capabilities. data, allowing them to build an With both AIS and PIS in place, accurate picture of their finances, from businesses will have additional protection against identity fraud and payment fraud, being able to identify potential cases far quicker and reduce the number of fraudulent transactions. They’ll also be able to save significant amounts of money on things such as insurance and chargebacks from fraud cases, which is crucial, particularly for SMEs, during a severe economic downturn when every penny counts.

In the longer term, too, the additional security provided by AIS and PIS can help businesses feel more confident about expanding their operations without the threat of fraud looming.

LOOKING AHEAD

BNPL payment methods are set to continue booming in the coming years, but, with increased regulation looming, businesses must adapt their security measures and combat BNPL fraud to save money, reduce customer concerns and meet regulatory standards.

With open banking solutions such as AIS and PIS, businesses can leverage their security and make it easier to spot when fraud is taking place, saving them money and giving them the confidence to grow. Furthermore, with PIS, customers can set up future-dated transactions, giving merchants even more certainty of collecting payment.

Open banking has the power to future-proof the growth plans of BNPL vendors, securing their business models and supporting consumers and retailers by maintaining access to this much-valued and increasingly utilised payment method.