Buy Now, Pay Later (BNPL), a trend that allows consumers to pay for their purchases in instalments, is fast gaining adoption in Singapore and retailers are riding on its growing popularity to provide consumers choice and flexibility.
Less stringent than credit cards, BNPL service does not qualify users based on income nor does it require minimum spending or processing fees. Late payment charges imposed are likewise lower.
Industry estimates BNPL transaction value in Singapore in 2021 at around $440 million.
While it constitutes a small percentage of the total consumer payments market, BNPL is anticipated to grow quickly with millennial shoppers helping to drive the adoption. Ablr, Atome, Fave, Hoolah, Latitude Pay, Pace, Split and Zip are among the growing list of BNPL service providers that are supporting niche verticals.
However, with opportunities come risks – and new payment trends often reveal new surfaces where fraud and abuse can take place. BNPL is essentially an instant loan application at the point of sale. Consumers most often opt for a BNPL payment for big-ticket items like electronics or furniture, but it also comes in handy for unplanned car repairs or pet emergency care.
The quick decision-making that comes with these crisis-timed transactions makes them especially ripe for fraud. The short time frame and the “softer” controls BNPL providers have compared to banks and credit card companies create opportunities for fraudsters to access tangible goods with a lower likelihood of initial detection.
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For Openpay, a leading BNPL provider, the ability to make accurate, real-time decisions rather than relying on manual review and rules is critical. This challenge led Openpay to partner with Forter to address the varying risks and fraud scenarios across their customer journey.
When it comes to BNPL transactions, businesses face various risks:
- ‘Buy now, pay never’: This occurs when someone uses their own identity data 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 mobile number from a prepaid 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 used it or returns a different item than was purchased.
This happens before full payment is made through BNPL instalments, meaning the BNPL provider is on the hook for the full value of the goods. Research from Forter shows that policy abuse losses might outstrip fraud losses and are estimated at US$65 billion annually.
- Card testing: Card testing fraud is how fraudsters can confirm that stolen card information is usable. The stolen card is initially tested through smaller transactions before being used for larger purchases. As BNPL transactions have a shorter time frame to make credit decisions, card testing fraud could be perpetuated through these purchases.
- 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 businesses into issuing such refunds by claiming that their old credit card account is now closed, and therefore, the refund must be put on a new card. This simple yet effective tactic puts businesses 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 recognise the purchase on their credit card, resulting in ‘friendly fraud.’ In other cases, opportunistic fraudsters attempt to circumvent and abuse company policies to either get money back or keep products for free.
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Naturally, fraud negatively impacts genuine customers and their retail experience. Customers may end up being mistaken for fraudsters and blocked from making purchases. Traditional fraud prevention also creates friction in the customer journey, causing unnecessary delays and hurdles.
Businesses must strike a balance between customer experience and revenue risk. This requires effective fraud detection to maximise conversions of trustworthy customers and optimise experiences across the entire customer journey.
To do this, fraud detection needs to be automated and data-driven in today’s digital economy. Businesses will do well by opting for a fraud protection solution 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.
Ultimately, BNPL has the potential to bring significant benefits to consumers in Southeast Asia with sufficient guardrails implemented. Considering BNPL payment’s local adoption rate, the Monetary Authority of Singapore (MAS) recently proposed the industry to develop a code of conduct to establish minimum safeguards to protect consumers. Led by the Singapore FinTech Association and BNPL players, the code of conduct is expected to be completed and launched by the second half of 2022.
As BNPL fraud is on the rise globally, Singaporean retailers are also realising the risks of BNPL and are taking steps to mitigate potential issues. In the long run, an effective fraud protection strategy will enable businesses to scale with confidence as they offer new payment services, add to product offerings, or even expand their business across borders.
Troy Nyi Nyi is the regional director for Southeast Asia and India at Forter
