bnpl article

Gen Z’s Digital Native Status Offers Zero Shelter from Fraud

And BNPL offers plenty of opportunities to criminals

Generation Z – those fresh-face youngsters born between 1997 and 2012, currently aged between nine and 24 years old – are the world’s first fully digital native generation. They are immensely tech savvy, having grown up using devices for learning and playing since infancy. 

But that doesn’t mean that Gen Z is immune to online fraud. Far from it. Instead, fraudsters are evolving and adapting their approaches in order to capitalize on the way that Generation Z uses technology. This means fraudsters will both adapt their methods to trick savvier users, as well as jump on the opportunity to expand to new sectors that Generation Z members embrace.

And Buy Now Pay Later (BNPL)-linked fraud is a leading example of this, impacting BPNL companies, online merchants, as well as members of Gen Z and the general public themselves. 

What are BNPL scams?

Buy Now Pay Later is a payment method that allows the customer to pay nothing upfront, then to make payments in small installments, along with a fee for their use of the BNPL service. It is a near-instant microloan model. According to the BNPL Fraud Guide on the SEON Fraud Fighters official website, it is this low-friction system that provides fraudsters with the opportunity to carry out this kind of loan fraud. 

Because, within this process, BNPL companies must perform credit checks without slowing down the shopper’s online checkout process, this opens a window for BNPL scammers. 

BNPL scams are a type of loan fraud that can encompass several different facades of fraud. These include synthetic identity fraud, where a fraudster leverages fictitious and real identity data to establish a credible looking identity with the goal of abusing the system.

Fraudsters use stolen IDs to create accounts, make purchases using BNPL, then vanish into the ether. Naturally, some also use stolen credit cards to fund their purchases. 

Because merchants tend to over-rely on the shift of liability to the BNPL provider, a gap is created between the two, ripe for criminals to take advantage in what Karisse Hendrick has dubbed “trojan horse” schemes, where they sign up for BNPL accounts, set up accounts with the merchant and later switch the payment method to stolen cards.

Why are BNPL scams aimed largely at Generation Z?

There are several reasons why fraudsters are eyeing up the potential pickings of Generation Z when it comes to BNPL scams. Firstly, Gen Z makes up 18% of all internet users, according to Statista. That’s a sizeable chunk of the online community for fraudsters to be targeting. 

Secondly, despite stereotypes to the contrary, members of Gen Z still possess wealth as a whole. Generation Z is projected to hit an impressive $33 trillion in income by 2030, per Kasasa. That accounts for over a quarter of total global income – hence scammers paying keen attention to them. 

There’s also the fact that Generation Z, more than any other generation, is embracing the concept of Buy Now Pay Later. While older shoppers have for years accepted the traditional credit card model of borrowing, just 43% of consumers aged between 18 and 31 use credit cards, as estimated by Bankrate in an article. That same group represents the biggest portion of the Buy Now Pay Later market. 

One interesting aspect of Gen Z’s penchant for using installments for payment is the wide variety of uses to which they are putting their ability to Buy Now Pay Later. Purchases vary from country to country, but one detailed report into BNPL use in the United States provides a fascinating insight into the sector. 

Published on the Credit Karma website, the study found that Generation Z’s most commonly purchased item was apparel, which made up 40% of their purchases. Online shoppers filled their baskets with clothes and shoes that they planned to pay for further down the line. Other items included electronics, beauty and health products, accessories, fitness equipment, auto repairs and other car-related products, luxury items, travel products and more. 

BNPL, in short, is rapidly becoming the preferred payment method of a generation whose spending power is going to dominate global consumerism for the coming decade or more. Sadly, this means that increasing numbers of scammers are turning their attention to BNPL and its Gen Z advocates. 

The evolution of BNPL fraud

With Generation Z so enthusiastically embracing the convenience of the Buy Now Pay Later model, it has the potential to majorly reshape the global ecommerce landscape. By 2024, BNPL is projected to account for 13% of all ecommerce payments. Why? Because it’s as if we’re in the new wallet wars, in which these providers might grow into shopping “supperapps” allowing you to do shopping at various connected merchants, essentially replacing mobile wallets for many shoppers. There is a huge amount to play for from the fraudsters’ perspective. 

Individuals who have had their identities stolen and their credit score negatively impacted by BNPL scams are by no means the only ones affected by this evolving type of fraud. 

The BNPL companies and the merchants with whom they work both suffer, losing money and time as a result of the fraudsters’ actions. The individual Gen Z members’ accounts are the way in, yes, but what they’re actually providing is a swift route of attack to lenders and merchants. And BNPL fraud is becoming increasingly sophisticated, too. 

At present, BNPL fraud encompasses a range of attack types. In addition to synthetic identity fraud, account takeover remains a very real threat. This is where scammers use stolen details to take control of a consumer’s account and then go on an online shopping spree. After racking up a long list of BNPL purchases, they disappear and move on to their next victim. 

Friendly fraud is also an issue. This occurs when an upfront payment is required, as is the case with some BNPL services. The scammer uses their own account to order an item but, when it’s received, they deny having ordered it. They contact their bank, which reverses the payment and, in most cases, the convoluted returns process for BNPL purchases means the scammer keeps the item as well as their cash while the merchant.

Though the onus of BNPL fraud seems to fall upon this type of company at first, there are still risks to online merchants themselves. For starters, no matter what happens with chargebacks, several passed BNPL purchases can place customers on the merchants’ trust list – yet they could still be fraudsters bending the rules in this way. Also, a criminal can take over such trusted users’ online store accounts, which are linked to BNPL payments.

At this point in time, it is the BNPL service that takes chargeback liability most of the time. But this can change. As a merchant, you need to check your contract as this honeymoon period between BNPLs and merchants can’t last forever. Eventually, the latter too will likely suffer losses to their revenue, increased chargeback ratios, and extra bank fees due to such schemes.

Moreover, there is reputational risk for merchants even as things stand. As BNPLs send chargebacks/unpaid purchases to recollection near-automatically, an online merchant can be held at fault by consumers whose stolen identities were used in a purchase, and now have to deal with debt collectors on their behalf.

Generation Z fights back

None of this is to say that Generation Z is just meekly accepting the increase in BNPL scams. Indeed, just as the scams themselves are evolving, so too are the ways in which this digitally savvy generation is responding to them. 

The use of YouTube to expose scammers (and, indeed, to waste the fraudsters’ time and energy with prank calls) is an example of this. YouTubers are spending hours on the phone to fraudsters, including live streaming their efforts to toy with them. 

This is providing plenty of content for video-hungry members of Generation Z to absorb as they educate themselves about the dangers of BNPL scams. 

Doing so has the potential to enable them to be safer as consumers and also to benefit the merchants and BNPL service providers that they use. Everyone wins, except the fraudsters. 

Fighting BNPL fraud & scams

For pioneering fraud prevention companies, this landscape provides a challenge – as well as several different touchpoints which can be improved using anti-fraud modules.

BNPL companies have to conduct KYC when onboarding new users, which also involves credit scoring. This provides opportunity to separate the wheat from the chaff in two ways: 

Firstly, device fingerprinting, IP analysis and behavioral algorithms will identify and catch suspicious hardware and software setups at sign-up, such as proxies, device spoofing and the like, frequently used by scammers to hide their tracks.

But there are ways to improve upon credit scoring itself. At SEON, we offer pre-KYC checks based on alternative data: data enrichment from digital footprinting that studies 35+ online profiles linked to email addresses and/or phone numbers. Our research and our work has shown that though criminals will take the time to create a new email address that resembles the persona they have stolen or created, they will not build a full online presence for them. 

Moreover, this method works on the underbanked and the unbanked, unlike traditional credit scoring. Therefore, BNPL brands have the option to serve more consumers, if they choose to.

Such methods are also good news for merchants accepting BNPL payments, as they too are susceptible to chargebacks and other fraudulent incidents. Both sign-up and the checkout process provide touchpoints at which to examine a shopper more carefully and gauge their intentions and legitimacy.

Final thoughts 

Online fraud is a global problem. No country can be safe from the nefarious efforts of scammers who set out to steal people’s information and use it for their own personal gain. 

The pandemic has played its part in this. NielsenIQ has found that 67% of consumers report shopping differently as a result of the pandemic, including shopping online more. 

The result? Even more people are available for fraudsters to target, whether they’re in Gen Z or any other generation -– especially so with the dizzying rise in remote and hybrid work.

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Author: Gergo Varga

Gergo Varga has been fighting online fraud since 2009 at various companies – even co-founding his own anti-fraud startup. He's the author of the Fraud Prevention Guide for Dummies – SEON Special edition. He currently works as the Senior Content Manager / Evangelist at SEON, using his industry knowledge to keep marketing sharp, communicating between the different departments to understand what's happening on the frontlines of fraud detection. He lives in Budapest, Hungary, and is an avid reader of philosophy and history.