BlogNews & UpdatesThe Importance of Identity Verification in the Buy Now Pay Later (BNPL) Sector

The Importance of Identity Verification in the Buy Now Pay Later (BNPL) Sector

ID verification in bnpl platforms

The Buy Now Pay Later (BNPL) sector has experienced significant growth in recent years, offering consumers the convenience of spreading the cost of online purchases over several months. However, this rapid growth has also attracted the attention of fraudsters and raised concerns among consumer interest groups and regulatory authorities. Identity fraud, in particular, has become a major risk for both BNPL platforms and their customers, leading to financial losses and potential damage to credit scores. In response to these challenges, BNPL providers must prioritize identity verification to protect consumers, safeguard their reputation, and comply with regulatory requirements.

The Risks of Identity Fraud in the BNPL Sector

Identity fraud poses a significant threat to the BNPL sector, with fraudsters exploiting the vulnerabilities of the payment method to steal data and money. The lack of robust regulations and standards in the emerging BNPL sector contributes to the increased risk of fraud. Additionally, the absence of sufficient data for identifying and preventing BNPL fraud further exacerbates the problem.

Types of Fraud in BNPL Platforms

Fraud in BNPL platforms can take various forms, depending on the perpetrators and their intended victims. Some common types of BNPL fraud include:

  1. Account Takeover Fraud: Fraudsters gain unauthorized access to a customer’s account by stealing usernames and passwords through phishing techniques.
  2. Synthetic Identity Fraud: Fraudsters create synthetic identities by combining freely available online data with false personal details. They use these identities to make BNPL purchases without the intention of repaying.
  3. New Account Fraud: Fraudsters open new BNPL accounts using stolen information obtained through hacking or data breaches.
  4. Non-Repayment Fraud: Fraudsters place orders using BNPL but have no intention of repaying the loan.
  5. Trojan Horse Fraud: Fraudsters create BNPL accounts using fake credentials and change the payment method to a stolen card after placing an order with a merchant.
  6. Family Fraud: Unauthorized purchases made by a relative, often a child, on a parent’s account.

Liability for BNPL Fraud

In most cases, BNPL providers bear the liability for fraud that occurs on their platforms. As the party that authorizes payments and acts as both the payment and lender, BNPL providers accept responsibility for any financial losses resulting from fraud. However, BNPL fraud has broader implications beyond financial losses, including a negative impact on the credibility and creditworthiness of customers.

The Impact of BNPL Fraud

BNPL fraud not only results in financial losses for providers but also affects customers and merchants. For customers, fraudulent purchases using their accounts can be difficult to reclaim, and stolen personal information leaves them vulnerable to further fraud.

Additionally, damaged credibility and creditworthiness can limit their future access to finance options. Merchants face reputational damage, which can adversely affect their relationships with customers, suppliers, and BNPL providers. A compromised website due to fraud can lead to customer distrust and loss of business.

Preventing Fraud in BNPL Platforms

To mitigate the risk of BNPL fraud, merchants must implement effective prevention and detection measures. The following strategies can help reduce the risk:

1. Identity Verification

Identity verification is crucial in preventing BNPL fraud. Merchants should conduct mandatory Know Your Customer (KYC) checks when customers open accounts or make purchases. These checks may include providing ID cards, proof of address, face verification, and biometric data. Enhanced Due Diligence checks should be implemented for customers with a higher risk profile.

2. Authentication Methods

Advanced authentication methods, such as 3D-secure (3DS), help verify the identity of cardholders at the point of payment. Multi-factor authentication, including passwords, usernames, SMS, and biometrics, adds an extra layer of security to ensure the customer’s identity before authorizing payment.

3. BNPL Transaction Monitoring

Merchants should monitor transaction data for suspicious patterns that indicate fraudulent activity. Red flags may include multiple logins from different devices and IP addresses, repeated payment attempts using the same card, or the use of reported stolen details. This data forms the basis for rule-based or machine-learning-based fraud prevention systems.

4. Address Verification

Address verification ensures that the addresses provided by customers during payment are genuine. Cross-referencing customer details with authoritative data sources helps validate addresses to prevent fraudulent transactions.

5. Machine Learning

Artificial intelligence and machine learning tools are highly effective in detecting and preventing fraud. These tools analyze transaction data quickly and accurately, identifying fraudulent patterns and stopping bad actors while minimizing false positives.


As the Buy Now Pay Later sector continues to grow, the risk of identity fraud also increases. BNPL providers must prioritize identity verification to protect consumers, maintain their reputations, and comply with regulatory requirements.

Implementing effective prevention and detection measures, such as identity verification, authentication methods, transaction monitoring, address verification, and machine learning, will help mitigate the risk of BNPL fraud. By adopting these strategies, BNPL providers can ensure the security and trustworthiness of their services, fostering continued growth in the sector.

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