Buy now, pay later has exploded in popularity, and no, this is not just another lockdown trend.
Gone are the days of traditional layaway payments. With merchants vying to meet the customers’ need for speed and convenience — buy now, pay later (BNPL) is turning out to be an absolute hit with the online shoppers.
Customers are flocking to merchants who offer them the option of breaking down purchases to bite-sized installment plans. BNPL stands out as a great alternative to credit card woes, which also explains why it has gained a strong foothold in the retail space.
Inviting customers to buy what they want, immediately, and giving them the option to space out the payments over time, has seen takers all over the world — especially among the younger generation and those with tight finances.
Labeled as “the future of millennial finance”, BNPL is soon going to be everywhere, both online and in-store too. The numbers are a testament to its growing power. As per an article in The Wall Street Journal, BNPL transactions are predicted to account for 4.5% of all E-commerce payments in North America by 2024.
Buy now, pay later: The story so far
Looking at the market penetration, BNPL, which started as a niche form of credit has now emerged as a global phenomenon. FinTech firms are scrambling to offer shoppers interest-free payment plans.
We see the likes of high-visibility firms such as PayPal’s ‘Pay in 4’, AfterPay, QuadPay, and industry leader Klarna dominating this space and allowing customers to delay the payment of goods. The banks are not holding back either — Goldman Sachs recently acquired GreenSky, a BNPL FinTech company for $2.2 Billion.
Coming to the merchants, they seem to be loving the idea of offering a frictionless experience to their customers — that involves opting for BNPL at the time of checkout. That’s not all, the BNPL model brings with it additional benefits for merchants such as lower shopping cart abandonment rates, repeat purchases, and higher purchase values, not to mention a loyal customer base.
Alleviating the financial burden for customers while enabling merchants to meet the growing online shopping demand, is no doubt a win-win situation.
Having said that, this unregulated model of lending has stoked fears of an increasing reliance on debt. Though BNPL resonates with a large cohort of customers — it’s soon becoming the new fraud frontier, as BNPL loans skip the need for a hard credit inquiry. We’ll explore ways in which fraud can occur and the key strategies to tackle BNPL fraud.
Does BNPL pose a greater fraud risk?
With merchants striving to offer seamless experiences for legitimate customers, they end up opening up the doors wider for fraudsters. Allowing customers to make a purchase by paying a fraction of the price or with no upfront payment, turns out to be catnip for fraudsters.
According to Reuters, close to 40% of BNPL consumers in the U.S. have missed out on more than one payment. Identifying fraud that is hidden in these bad debt losses is what remains to be conquered.
The need to make credit decisions within the short time frame that it takes a customer to complete a transaction — would end up in BNPL providers making hasty decisions. This may result in a lower likelihood of detecting fraudsters at the time of purchase.
Fraud could materialize at different stages of the BNPL model:
- Chargeback fraud: Chargeback fraud occurs at instances where the BNPL providers require an initial payment as a part of the transaction. Chargebacks usually arise when legitimate customers notice that a fraudster has stolen their credit card to make a payment. On the other hand, fraudsters could use their own credit card and deny making the transaction. Chargebacks due to stolen credit cards are on the rise and end up being a costly problem for merchants.
- Account takeover fraud: In such cases, opportunistic fraudsters bypass the BNPL application process and hack into the accounts of shoppers who are already approved for BNPL. They then change the shipping address and make a fraudulent purchase.
- First-party fraud: It’s now hard to tell between bad debt and first-party fraud, as fraudsters are starting to use their own identity to apply for BNPL with no intention of making the required installment repayments.
- Third-party fraud: The frictionless application process for BNPL is making way for fraudsters to use synthetic identities or in most cases fake or stolen data to commit third-party fraud.
How to beat the new wave of fraud in BNPL
Service providers or banks that issue BNPL loans, shoulder the risk of loss from fraudulent transactions.
A key challenge lies in identifying fraud and being able to differentiate it from a credit risk scenario, where the customer is unable to repay due to a lack of funds.
However, adopting a multi-layered approach will help merchants and BNPL providers fight fraud at every stage:
- Identity and intent verification: In the absence of hard credit inquiry, BNPL providers should validate data provided by customers. Reviewing the qualification requirements for BNPL loans is a great point to start with. Placing stringent checks on data provided like Email Ids, shipping addresses, and other personal details are required to detect fake or synthetic identities.
- Applying 3D Secure (3DS) to large purchases: Additional layers of protection can be included by using 3DS, where the card issuers are required to verify the identity of the shopper at the time of checkout. As 3DS comes with additional costs, BNPL providers can screen transactions before sending for 3DS to ensure that they only pass on suspected fake identities.
- Review historic fraud trends: Going back and looking up fraud patterns in the past, will help BNPL providers and merchants better classify transactions as genuine or fraudulent.
- Enforcing effective return policies: Phony returns and chargebacks can be reduced to a great extent by implementing stricter rules that will translate into fewer returns.
Gear up to mitigate BNPL fraud risk
As the BNPL fever catches on, it’s important to watch out for sophisticated fraudsters who are finding new ways to exploit the system. Leveraging machine learning models to assess the transactions against identity data and customer behavior data — is a powerful move to stop BNPL fraud.
