Buy Now, Pay Later: BNPL Risk Management Is Essential

Nicholas Robbins | Monday, February 6th, 2023 | 10 minutes

Buy now, pay later (BNPL) programs offer the ability to splurge on the latest high-tech gadget or designer piece without paying all at once. Customers can make purchases and delay payments, often without added interest. This financial flexibility makes BNPL incredibly popular, especially during shopping spree seasons.

As BNPL grows, the target on its back gets ever clearer, attracting fraudsters exploiting its vulnerabilities. For BNPL service providers and banks looking to adopt such offerings, securing these transactions isn’t just an option; it’s essential to safeguard profitability and consumer trust.

The state of buy now, pay later

Popularity for BNPL programs surged during the global pandemic event as customers sought financial flexibility for online purchases. By the end of 2021, over half of online shoppers surveyed said they prefer to have the option available at checkout, driving increased basket sizes and reduced cart abandonment, per a TRC Market Research survey. As of 2024, there’s been a surge in business-to-business (B2B) BNPL offerings, according to Juniper Research.

The sector continues growing and diversifying. Juniper’s latest BNPL market research shows that it’s not just dedicated service providers anymore. Banks are increasingly moving into the space. Juniper estimates $334 billion will go through BNPL this year and predicts that figure to more than double over the next 4 years.

What’s at risk with BNPL fraud?

As BNPL options proliferate, so do the associated financial risks and costs resulting from fraud. These can be quite extensive. They can impact short-term profits as well as longer-term business goals and even the viability of a BNPL program provider.

Financial impact - How it hurts

  • Direct losses: Malicious fraud can lead to significant immediate financial losses, primarily coming from unpaid credit and revenue-stealing chargebacks initiated by fraudsters.
  • Increased operational costs: Dealing with fraud requires monitoring, investigating, and rectifying potentially fraudulent activities. This can deliver a hefty hit to labor costs if not managed properly.
  • Chargebacks and penalties: Chargebacks not only affect liquidity but leave you open to chargeback and arbitration fees. Excessive chargebacks can lead to merchant account monitoring programs, higher processing fees, and further penalties.

Strategic risks - Dangerous exposure

  • Damage to consumer trust: Succumbing to fraud — especially on a large scale — can damage brand reputations, diminishing customer loyalty and potentially driving away profitable customers.
  • Regulatory compliance risks: Failure to properly manage avenues of fraud can open a host of regulatory risks if a company fails to comply with standards, resulting in fines or sanctions.
  • Ongoing resource drain: Ineffective or inefficient risk management can divert resources from other ongoing initiatives, affecting strategic goals and tanking current performance indicators.

Long-term viability - Lasting impact

  • Inhibited growth: Over the long term, the reputational damage and financial losses from BNPL fraud can inhibit the ability to scale operations.
  • Market competition: The ability to manage fraud effectively in the growing BNPL marketplace is a competitive advantage. Poor management can erode market share.

Still, research continues to show that the rewards can outweigh the risks as BNPL adoption expands.

Examples of buy now, pay later fraud

It helps to understand some of the types of fraud that require such careful management. These threats prey upon the simplicity and accessibility of buy now, pay later programs. Any one could lead to the damages mentioned above, but fraudsters rarely stick to just a single method.

  • Synthetic identity and identity theft: Fraudsters create fake identities or steal real ones to open BNPL accounts. This can lead to significant financial losses because funds are rarely paid back.
  • Friendly fraud or first-party fraud: Customers who dispute legitimate charges, often due to forgetfulness or financial strain, can drive chargebacks. And chargebacks sacrifice revenue.
  • Payment token switching: Fraudsters manipulate payment details to avoid full payment after they receive the goods. Again, failing to pay means lost revenue.
  • Account takeover (ATO): Attackers hijack legitimate accounts to make unauthorized purchases.This type of fraud can have the greatest impact on customer trust and brand reputation. Plus, when the actual account holder discovers the unauthorized purchases, you could receive chargebacks.
  • Bust-out scams: Individuals max out extended credit limits without any plan or intention to repay. This type of scam affects most unsecured lines of credit, including BNPL and credit card limits.

The good news is that these are rarely, if ever, new inventions. Most fraud affecting BNPL has roots in other forms of credit scamming, which gives dynamic fraud detection and prevention solutions an edge in combating them.

What can you do to protect your BNPL programs?

As buy now, pay later programs continue to integrate into mainstream finance, there are steps you can take to help mitigate fraud. Comprehensive fraud management strategies are the only way to effectively keep fraudsters at bay while getting the best return on investment (ROI).

  • Implement dynamic fraud detection systems: The solutions you put in place should combine behavior analytics with transaction monitoring for real time fraud detection and responses.
  • Strengthen authentication processes: Multi-factor authentication (MFA) and biometrics can enhance account security. This solution is particularly valuable for high-risk transactions.
  • Leverage data to establish limits: Use the insights you gain from fraud prevention systems to refine risk thresholds and credit limits. These should align with customer behavior as well as economic conditions.
  • Educate customers: Maintain a proactive stance when it comes to friendly fraud by increasing awareness about BNPL services, including payment obligations and security practices.

This may seem like quite a challenge, especially for implementation at scale. That’s where aid from a trusted solutions provider can make all the difference. Experience matters, and even BNPL pioneers can benefit from the latest tools and strategies in fraud detection and prevention.

Kount can help

BNPL providers and banks have a significant opportunity to capitalize on the growing market by ensuring the flexible payment options they offer remain secure and trustworthy. By implementing robust fraud prevention strategies with solutions like ours, you can protect revenue, enhance customer satisfaction, and build relationships that foster long-term loyalty. Plus, we make it look easy. Here’s how Kount tackles just some of the challenges in the BNPL sector.

  • Real-time fraud detection: Using AI and machine learning, Kount analyzes transactions to detect anomalies that indicate fraud. This proactive approach helps prevent identity theft and synthetic identity fraud.
  • Enhanced identity verification: Kount helps ensure that only legitimate users open and use BNPL accounts by integrating digital and physical verification methods.
  • Chargeback management: Kount’s tools, including Order Insight, Rapid Dispute Resolution (RDR) and prevention alerts, help resolve disputes quickly. Effective chargeback management reduces chargeback rates and helps you retain revenue.
  • Account protection: Kount monitors user activities for unusual actions, such as sudden changes in purchasing behavior or access from new devices, to combat account takeover. Additional authentication is also required for changes to account details.

Whether you’re just venturing into the BNPL space or already delivering industry-leading solutions for shoppers worldwide, Kount can help mitigate fraud risks and secure your programs. Discover how our integrated fraud prevention solutions can bolster your growth in this competitive new market. Schedule a demo with Kount and embrace the future of finance by securing your buy now, pay later offerings against potential fraud.

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Nicholas Robbins

Content writer

Nicholas Robbins has over 15 years of content creation expertise. A self-acknowledged high-tech redneck, Nic's passions include reading, investment, and guiding others along the path to financial security.