How fraudsters are exploiting customers using popular BNPL service providers

Improperly regulated Buy Now Pay Later services aren't just growing in popularity among consumers, they're also proving to be a hit with criminals.

Retail finance, when used correctly, is an advantageous payment option for both retailers and consumers and it should continue to be so. It is specifically the BNPL providers performing soft credit checks where fraudulent activity is on the rise, which include Klarna, Afterpay and Affirm, according to fraud experts.

BNPL products are becoming increasingly popular among Gen Z's and Millennials, they are offered widely online by fashion retailers whereby they allow shoppers to split payments at checkouts or pay 30 days later interest-free. They've become massively popular in the U.S. and Europe, and generated almost $100 billion in transactions globally in 2020 alone.

Criminal gangs are exploiting weaknesses in the application process for BNPL loans, experts say, using clever tactics to slip through undetected and steal items such as bicycles, booze and video game consoles.

Martin Rehak, CEO and co-founder of Czech fraud detection start-up Resistant AI said that one of the vulnerabilities is BNPL firms' reliance on data for approving new clients. Many companies in the industry don't conduct formal credit checks, instead using internal algorithms to determine creditworthiness based on the information they have available to them.

Rehak said many scammers are stealing people's identities or taking over their accounts to evade detection, making unsuspecting victims foot the bill. He declined to name any specific companies being targeted, however, saying Resistant AI counts a number of BNPL businesses as clients.

Warnings of BNPL fraud are particularly timely as Black Friday kicks off the critical holiday shopping season next week. "There's going to be a huge amount of fraud hidden in there because they always lower their security checks during those events because they don't want it to impact sales," said Kevin Gosschalk, founder and CEO of fraud-prevention start-up Arkose Labs.

Consistent campaigning has now led to the UK Treasury launching a consultation into bringing the sector under regulation. The Treasury said that the consultation "sets out policy options to achieve a proportionate approach to regulation of BNPL".

Martin Lewis, founder of MoneySavingExpert.com, summarises the issue by saying retail finance "isn't automatically a bad thing to do" and that when done right it "can be a useful tool to help people spread costs."

The ACT and ActSmart, members of the Independent Retailers Confederation (IRC), has previously raised concerns about the improper regulation of BNPL providers such as Klarna, Openpay and LayBuy and the risks that they bring to potential customers.

Some debt charities argue that it is the retailer's responsibility to educate their customers of the risks being undertaken when committing to any BNPL payments. With a retailer's reputation at stake, as well as the wellbeing of their customers, it is imperative that businesses find a finance provider that they can trust and that is correctly regulated by the FCA.

The ACT have created a mini-series - Choosing the right finance provider, avoid the pitfalls - which assists retailers by highlighting what to look out for when choosing the right finance provider for you.

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