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Common Types of BNPL Fraud and the Role of KYC/AML Regulations
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The Buy Now Pay Later (BNPL) services are growing rapidly. 42% of credit customers are interested in BNPL products worldwide, highlighting the immense popularity that buy now pay later services have gained. The rapid growth has led regulatory bodies to shift their focus toward ensuring the security and integrity of financial transactions. This is where Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations become critical, enhancing safety and helping BNPL service providers avoid non-compliance fines.
A customer must create an account with the Payment Service provider (PSP) to conduct transactions. This opens the door for scammers seeking opportunities to commit BNPL fraud.
Criminals compromise a genuine user’s account to commit a BNPL scam on any website that accepts such a service provider. Due to the deferred payment nature, the genuine user might remain unaware of the fraudulent activities for a considerable period, possibly spanning several weeks.
Criminals use stolen data for commiting synthetic buy now, pay later fraud. This form of synthetic fraud involves the scammer fabricating a fictitious identity to establish a fresh account and conduct transactions.
This type of fraud occurs when a family member of the authorised purchaser gains access to their account. For instance, a child may make an unauthorised purchase using a parent’s device, which the parent becomes aware of after they are done with it.
Registering for a new BNPL account is a smooth and easy process. However, a new account scam occurs when a scammer assumes a fictitious identity to establish such an account. This fraud frequently occurs at the banking level, where criminals exploit stolen or synthetic identities to acquire fresh credit or debit cards, enabling them to carry out illicit transactions.
In non-repayment fraud, the purchaser buys goods or services without the intention of repaying them. Non-repayment scams can manifest as isolated incidents or involve combining one or more tactics to execute multiple purchases without settling them.
Trojan horse scam is frequently a direct outcome of ATO or synthetic fraud. It occurs when a scammer creates an account using fabricated or stolen user credentials and subsequently alters the payment method to link it with another compromised account. In this manner, scammers can make multiple BNPL purchases without ever making payments for any of the transactions.
The SIM swap scam is categorised as an Account Takeover (ATO) Fraud that typically exploits vulnerabilities in two-factor authentication systems. Specifically, it targets situations where the second factor or step relies on text messages or calls sent to a mobile phone. BNPL accounts become susceptible to this type of scam, as scammers can easily target them, with access to bank details being just a few clicks away.
In traditional eCommerce, a cardholder’s available funds or credit often serve as a helpful safeguard against overspending. In contrast, BNPL can create a perception of greater financial freedom for buyers at the time of purchase, as they may not feel as restricted by the money they have on hand. Nevertheless, this increased flexibility could lead to buyer’s remorse later on, potentially resulting in goods being returned, even without a valid reason.
Adhering to KYC and AML requirements is no longer just a matter of preference; it has become a legal obligation for BNPL companies. Each jurisdiction defines its criteria for proper KYC or AML checks, but the repercussions of not complying remain consistent:
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