Criminals exploit buy now, pay later services like Klarna and Afterpay

The Klarna logo displayed on a phone screen.

Jakub Porzycki | NurPhoto | Getty Images

LONDON – Buy now, pay later, the services are not only popular among consumers. They are also proving to be a hit with criminals.

Fraudulent activity is on the rise on some of the industry’s largest Buy Now, Pay Later (BNPL) platforms, including Klarna, Afterpay and Affirm, according to fraud experts who spoke to CNBC.

BNPL products allow buyers to spread the cost of their purchases over three or four months, often without interest. They have become overwhelmingly popular in the United States and Europe and generated nearly $ 100 billion in transactions worldwide in 2020 alone.

“Criminals love to buy now, pay later,” Martin Rehak, CEO and co-founder of Czech fraud detection start-up Resistant AI, told CNBC. “You can already see the crime on many levels. “

Criminal gangs are exploiting weaknesses in the BNPL loan application process, experts say, using clever tactics to sneak undetected and steal items ranging from pizza and alcohol to video game consoles.

One of the vulnerabilities, according to Rehak, is BNPL companies’ reliance on data to approve new customers. Many companies in the industry do not perform formal credit checks, but instead use internal algorithms to determine creditworthiness based on the information they have.

Retailers working with BNPL platforms “classify things differently,” Rehak said, adding that this can lead to inconsistencies. “There is always a way to exploit this and steal from you using someone else’s mistake.”

For example, a partner merchant can organize a special promotional event for alcohol, but assign a vague category as “special event”. This runs the risk that fraud will slip through the cracks if an artificial intelligence system does not recognize the category and assign it a more generic label with a low risk of default.

Rehak said many crooks steal people’s identities or steal their accounts to evade detection, forcing unsuspecting victims to foot the bill. He declined to name specific companies targeted, however, saying Resistant AI had a number of BNPL companies among its clients.

“Very lucrative”

Kevin Gosschalk, founder and CEO of US fraud prevention start-up Arkose Labs, said criminals increasingly target BNPL platforms because they have “softer” controls than big banks and card companies credit.

“Fintechs are very lucrative because they are generally fast growing, early stage companies,” he told CNBC. “They have much less stringent checks than the big banks that have been around for many years on the security side, so that makes them a good target.”

Klarna refuted claims that its fraud checks and controls are more lax than those of banks, while Afterpay said it has “extensive back-end fraud processes” to verify new users.

Gosschalk said scammers in the United States are using these services to exploit supply shortages. He gave the example of criminals buying PlayStation 5 consoles on BNPL and flipping them for much higher prices online for a profit.

Because BNPL services allow users to split their purchases over four equal installments, scammers can only pay 25% of the base value – about $ 125 for a PS5 – and avoid repaying the rest, the CEO said. ‘Arkose Labs.

Arkose Labs says its main customer base is financial institutions, tech giants and video game companies. The company’s customers include Microsoft and PayPal, the latter of which offers its own BNPL product.

Experts say another reason BNPL systems are targeted is their popularity – it’s much easier to go unnoticed when there’s a sea of ​​other people applying for credit.

“If you want to survive in the payments business, you have to grow really fast,” Rehak said.

And it’s not just individuals who go out of their way to defraud these services, according to Rehak. Criminals also hire others to trick the system, offering their know-how to commit large-scale frauds.

Holiday shopping

BNPL’s fraud warnings 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 lurking in there because they always lower their security checks during these events because they don’t want it to impact sales,” Gottchalk said.

Unlike credit card companies, the bulk of BNPL companies’ income comes from merchants. Companies like Klarna and Afterpay charge retailers a nominal fee on all transactions processed through their platforms.

The main selling point for traders is that they often see their sales volumes increase as a result. This has led to concerns that BNPL’s plans will encourage consumers to live beyond their means.

Retailers are generally happy to accept some level of fraud as the price of doing business, Gottchalk said.

Alex Marsh, head of Klarna in the UK, said the company was carrying out “advanced and in-depth checks internally and externally”.

“These comments based on observations from other BNPL companies are nothing like Klarna’s business operations or fraud prevention capabilities,” Marsh said. “Our fraud rates are half that of credit card fraud and we have much more sophisticated technology in our cash registers and our products than banks and credit card issuers.

“We work more closely with merchants than with the average bank or credit card issuer, which means we get a richer level of product data to build stronger and more dynamic protections than the methods obsolete payments such as credit cards. “

Afterpay said fraud management was a “top priority” for the company and that losses from fraud represented less than 1% of its global sales in the past fiscal year.

“Our risk management system is based on state-of-the-art, proprietary machine learning algorithms that are constantly tuned to counter any potential threats,” Rich Bayer, UK national director of Clearpay, the international division of Afterpay, told CNBC.

“Our global risk management team is very close to any potential loss attack or anomaly and responds quickly to keep our customers and traders safe at all times. “

The BNPL sector has attracted interest from large corporations, with companies from PayPal and Square scrambling to play a role in the space. PayPal started offering its own BNPL feature last year, while Square recently agreed to acquire Afterpay for $ 29 billion.

At the same time, the rapid growth of the industry worries regulators. The UK government is keen to put BNPL products under regulatory oversight and is currently consulting to determine how to move forward with its plans.

For their part, BNPL platforms like Klarna and Afterpay say they are in favor of regulation as long as it is “proportionate”.

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