Criminals exploit buy now, pay later services like Klarna and

LONDON — Buy now, pay later services aren’t just popular among consumers. They’re also proving to be a hit with criminals.

Fraudulent activity is on the rise at some of the largest buy now, pay later (BNPL) platforms in the industry, which include Klarna, Afterpay and Affirm, according to fraud experts who spoke with CNBC.

BNPL products let shoppers split the cost of their purchases over three or four months, often interest-free. They’ve become massively popular in the U.S. and Europe, and generated almost $100 billion in transactions globally in 2020 alone.

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

Criminal gangs are exploiting weaknesses in the application process for BNPL loans, experts say, using clever tactics to slip through undetected and steal items ranging from pizza and booze to video game consoles.

One of the vulnerabilities, Rehak says, is BNPL firms’ 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.

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

For example, a partner merchant may run a special promotion event for alcohol but assign a vague category like “special event.” This runs the risk of fraud falling through the cracks if an artificial intelligence system doesn’t recognize the category and gives it a more generic label with low default risk.

Rehak said many scammers are stealing people’s identities or taking over their accounts to evade detection, making unsuspecting victims foot the bill. He declined to name any specific companies being targeted, however, saying Resistant AI counts a number of BNPL businesses as clients.

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

“Fintechs are very lucrative because they’re typically fast-growing, early-stage companies,” he told CNBC. “They have much lower controls than the big banks that have been around for many years on the security side, so it makes them a good target.”

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

Gosschalk said scammers in the U.S. are using such services to exploit supply shortages. He gave the example of criminals getting PlayStation 5 consoles on BNPL and flipping them at much…