When Payment Fraud Becomes Litigation: Legal Strategies for Fintechs in the Buy Now Pay Later (BNPL) Era

Buy Now Pay Later platforms moved fast, scaled faster, and changed how consumers pay. But as BNPL products mature, a familiar pattern is emerging: payment fraud disputes that once looked like operational issues are now turning into full-blown litigation.

For fintech companies, retailers, and lenders operating in this space, the legal risk is no longer theoretical. Chargebacks, merchant clawbacks, consumer claims, and regulatory scrutiny are converging,  and when fraud hits, the question quickly becomes not whether lawyers get involved, but how prepared you are when they do.

What Is BNPL and Why Is It Creating Legal Risk?

BNPL allows consumers to split purchases into installments, often without traditional credit checks. That frictionless experience helped fuel explosive growth, but it also created gaps in accountability.

When a transaction goes wrong, multiple parties may be involved:

• The BNPL provider
• The retailer or merchant
• Payment processors
• Third-party underwriting or fraud detection vendors
• The consumer

In fraud cases, each party tends to point elsewhere. That is where litigation begins.

Common BNPL Fraud Scenarios That Lead to Lawsuits

Most BNPL disputes that escalate into litigation follow one of a few patterns.

Unauthorized Transactions

Consumers claim purchases were made without authorization, merchants seek payment, and BNPL providers are left deciding whether to absorb losses or pursue recovery.

Synthetic Identity Fraud

Accounts opened using partially real, partially fabricated identities. These cases often surface months later, after goods are delivered and installment payments stop.

Merchant Misrepresentation

Retailers may dispute liability when BNPL providers deny payment due to alleged fraud indicators or violations of merchant agreements.

Chargeback Cascades

Traditional chargeback frameworks were not built for BNPL structures. Disputes often fall into gray areas where contracts do not clearly allocate responsibility.

Each of these scenarios can quickly turn into breach of contract claims, indemnity disputes, or complex multi-party litigation.

Who Is Liable When BNPL Fraud Happens?

This is one of the most searched questions in BNPL litigation, and one of the least settled.

Liability typically depends on:

• The merchant services agreement
• BNPL platform terms and conditions
• Risk allocation clauses
• Indemnification language
• Fraud detection obligations
• Consumer disclosures

Courts are increasingly being asked to interpret agreements that were drafted quickly during growth phases, not with litigation in mind. Ambiguous language is rarely resolved in favor of the party that drafted it.

Why BNPL Regulations Add Another Layer of Litigation Risk

BNPL products sit in a regulatory gray zone. They resemble credit products, but often fall outside traditional lending frameworks.

This creates exposure on multiple fronts:

• Consumer protection claims
• Unfair or deceptive practices allegations
• State-by-state regulatory inconsistencies
• Federal agency scrutiny

As regulators refine how BNPL should be treated, past practices are being examined through new lenses. What was once standard industry behavior may now be challenged in court.

When BNPL Disputes Move From Operations to Court

Fintech companies often try to resolve fraud disputes internally, but litigation becomes likely when:

• Losses reach material levels
• Merchants threaten breach claims
• Consumers file class-style complaints
• Indemnity demands escalate
• Regulators initiate parallel investigations

At that point, documentation, internal decision-making, and contract language matter more than technical explanations of how the platform works.

Litigation Strategies for BNPL Providers and Fintechs

Effective legal strategy in BNPL disputes starts long before a complaint is filed.

Contract Enforcement and Defense

Well-drafted merchant and user agreements are the first line of defense. Litigation often turns on whether risk allocation clauses are enforceable as written.

Early Case Assessment

Understanding whether a dispute should be litigated, arbitrated, or resolved quietly can significantly reduce exposure.

Fraud Attribution Analysis

Courts want clarity. Demonstrating how fraud occurred, who controlled each step, and where contractual duties were triggered is critical.

Limiting Class Exposure

Many BNPL disputes carry class action risk. Procedural defenses, arbitration provisions, and standing challenges can shape outcomes early.

What BNPL Companies Should Be Doing Now to Reduce Litigation Risk

If your company operates in or supports BNPL transactions, waiting until fraud becomes a lawsuit is already too late.

Smart risk management includes:

• Reviewing merchant agreements for ambiguity
• Updating indemnification and limitation clauses
• Aligning fraud detection obligations with reality
• Ensuring consumer disclosures match operational practices
• Preparing for regulatory overlap with litigation strategy in mind

These steps do not eliminate disputes. They determine how defensible your position is when one arises.

How a Business Litigation Firm Fits Into BNPL Disputes

BNPL litigation sits at the intersection of commercial disputes, payment fraud, and regulatory risk. It requires lawyers who understand how contracts, technology, and business realities collide in court.

At Ayala Law, we represent businesses facing complex commercial disputes, including payment fraud, contract enforcement, and multi-party litigation involving financial technology platforms. Our focus is not abstract theory, but practical strategy that aligns legal outcomes with business realities.

If your company is dealing with BNPL-related disputes, fraud claims, or contract enforcement issues, contact one of our experienced trademark attorneys in Miami at 305-570-2208.

You can also contact our team directly at: arianna@ayalalawpa.com 

Schedule a case evaluation online here.

[The opinions in this blog are not intended to be legal advice. You should consult with an attorney about the particulars of your case].