The phone screen has a logo on it.
Pay later services are popular among consumers. They are proving to be a hit with criminals.
Fraudulent activity is on the rise at some of the largest buy now pay later platforms in the industry according to fraud experts who spoke with CNBC.
Shoppers can split the cost of purchases over a period of three or four months. They have become so popular in the U.S. and Europe that they generated almost $100 billion in transactions in 2020.
Martin Rehak, CEO and co-founder of Czech fraud detection start-up Resistant AI, told CNBC that criminals love buying now and paying later. You can see crime on many levels.
Criminal gangs are exploiting weaknesses in the application process to steal items such as pizza and booze, experts say.
One of the vulnerabilities is the reliance on data for approving new clients. Many companies in the industry don't conduct formal credit checks, instead using internal algorithms to determine creditworthiness based on the information they have available to them
Rehak said that retailers working with the platforms can confuse things differently. There is a way to steal from someone else using their mistake.
A partner merchant may run a promotion for alcohol but assign a vague category like "special event." If an artificial intelligence system doesn't recognize the category and gives it a generic label with low default risk, this will cause fraud to fall through the cracks.
Rehak said that many people are victims of identity theft or being taken over their accounts to avoid detection. He wouldn't say which companies were being targeted, but said that a number of businesses were clients.
The founder and CEO of American fraud-prevention start-up Arkose Labs said that criminals are targeting the platforms of the British National Bank as they have more controls than the big banks.
He told CNBC that fintechs are very lucrative. It makes them a good target because they have lower controls than the big banks.
Afterpay said that it has extensive back-end fraud processes in place to verify new users, while Klarna denied that its fraud checks and controls were less strict than banks.
The U.S. is being used to exploit supply shortages. He showed how criminals could get a PS5 console on BNPL and flip it for much higher prices online to make a profit.
Fraudsters can pay 25% of the base value and not have to pay back the rest because of the four equal installments of the BNPL services.
Financial institutions, tech giants and video game companies are the main clientele of Arkose Labs. The firm has customers such as Microsoft and PayPal, which have their own products.
It is easier to go unrecognized when there is a sea of other people applying for credit.
Rehak said that if you want to survive in the payments business, you must grow quickly.
According to Rehak, it isn't just individuals who are trying to cheat these services. Criminals are willing to help others cheat the system in order to commit fraud.
Black Friday kicks off the critical holiday shopping season next week, and there are warnings of fraud.
There will be a lot of fraud hidden in there because they always lower their security checks during those events because they don't want it to impact sales.
Unlike credit card companies, the bulk of the revenue comes from merchants. Retailers pay a small fee on all transactions processed through their platforms.
Merchants often see their sales volumes increase as a result. Concerns have been raised that the plans are encouraging consumers to live beyond their means.
Retailers are happy to accept some level of fraud as a price of doing business.
Alex Marsh is the U.K. chief of Klarna.
According to Marsh, the comments based on observations of other firms do not match the capabilities of Klarna. Our fraud rate is half that of issuers of credit card fraud, and we have more sophisticated technology in our checkout and products than the banks and credit card issuers.
We work closer with merchants than the average bank or credit card issuer, which means we get a richer level of product data to put in place stronger and more dynamic protections than outdated payment methods such as credit cards.
In the last financial year, losses as a result of fraud accounted for less than 1% of Afterpay's global sales.
Rich Bayer, U.K. country manager for Clearpay, told CNBC that their risk management system is based on market-leading proprietary machine learning.
The global risk team is very close to any potential attack or loss abnormality and reacts fast to keep both our customers and merchants safe.
Major corporations are interested in the sector, with companies like Square and PayPal vying to play a role. Last year, Square agreed to acquire Afterpay for $29 billion, while PayPal started offering its own feature.
The rapid growth of the industry is worrying regulators. The U.K. government wants to bring the products under regulatory oversight, and is currently running a consultation to figure out how to proceed.
For their part, platforms like Afterpay and Klarna say they would welcome regulation if it was proportional.
