Buy Now, Pay Later (BNPL) can be a lucrative option for payment providers, but it’s not without risk.
Of late, consumers are increasingly being enticed into buying what they want now and paying for it later – in installments over time, both online and in-store. This point-of-sale loan scheme, called buy-now-pay-later (BNPL), is one of the fastest-growing payment options for consumers. For instance, Worldpay from FIS forecasts BNPL to grow to 4.5% of North American e-commerce payments by 2024, from 1.6% in 2020.
One of the reasons it’s so popular is that most BNPL providers charge no interest. This means that BNPL offers consumers greater payment flexibility and reduces inhibitions about purchasing. This makes it an attractive option for merchants to offer, as it leads to higher conversion and lower cart abandonment rates. Therefore, it allows them to capitalize on revenue they would have otherwise lost.
BNPL: A growing payment option
While BNPL arrived in the US as early as 2012 when Affirm started offering long-term financing, it really took off during the COVID-19 pandemic. Europe, where Klarna began BNPL options as early as 2005, and Australia, with popular services like Openpay and Zip in 2013 and Afterpay in 2014, were ahead of the curve.
Of course, after the surge in e-commerce spending because of the pandemic, BNPL transactions continue to rapidly grow across the world. In fact, a joint Credit Karma/Qualtrics survey reports that 44% of Americans already use a BNPL service. So, players across the industry are coming on board with these schemes, with MasterCard, PayPal, and even Amazon announcing their own BNPL options.
A lucrative opportunity for financial institutions
As fintech brands like Affirm, Klarna, and Onepay gain more traction for their BNPL payment options, traditional financial institutions rush to come up with their own BNPL schemes to stay relevant. Citizens Bank, for example, launched its own BNPL offering, Citizens Pay, earlier this year. More recently, Mastercard unveiled its BNPL program, Mastercard Installments, in September 2021.
Apart from allowing them to stay competitive, BNPL offers a great opportunity for these companies. This is because merchants are willing to pay a high merchant discount rate (MDR) to the BNPL provider, often reaching 2-3x the MDR of a typical credit or debit card payment. Merchants, on their part, count on higher conversion rates and lower cart abandonment rates to offset this increased cost. For the BNPL providers, it is a lucrative opportunity, but not without risk.
Increased fraud risk
Depending on the BNPL model, the default risk often lies with the financial institution. Usually, BNPL providers provide the funds for the consumer’s purchase upfront to the merchant, collecting payments later directly from the consumer. So, most of the risk from fraudulent transactions or defaults lies with the financial institution rather than the merchant. In fact, this business model means that the banks could end up bearing up to 100% of the losses due to fraud.
For example, fraudsters could buy through BNPL using stolen credit card information. Or, they could open a new bank account and acquire a credit card under a false identity, purchase several products, and then default on payments. As an effect, financial institutions could face significant losses. For merchants, fraudulent chargebacks or returns can occur. This forces them to lose on the revenue of the purchase and possibly lose merchandise.
The risk of fraud is increased by the fact that BNPL providers, in the interest of lowering customer friction, avoid conducting a formal credit inquiry. BNPL is basically a loan application at the point of sale. So, the lack of thorough credit checks creates an easy entry point for fraudsters, and they find creative ways to exploit it. Once a fraudster purchases the product using a BNPL option, they either make one payment and default on the rest, or make no payments at all.
Address BNPL fraud with Fraud.net
It is essential for financial institutions offering BNPL plans to have a strategy ready to manage their financial and fraud risks. First, banks need to understand their own risk appetite for the BNPL offering. They must also distinguish between bad debts and fraud. Finally, they can use fraud prevention technology to mitigate their risks and protect themselves.
Fraud.net can help. Our application fraud prevention platform is specially designed to protect against BNPL fraud. It helps you review BNPL applications for any associations with fraudsters and delivers insights to alert you to potential BNPL fraud. What’s more, the Fraud.net platform’s comprehensive checks are rapid enough to lower customer friction.
Other functions of our platform include:
- Velocity and linkage analyses to ensure the transaction is associated with a genuine customer
- Checks for previous bad outcomes on BNPL transactions’ billing addresses
- Insights on the number of times an item has been purchased by an IP address or if multiple products were ordered to different locations by a single IP address (an excellent indicator of fraud)
- Dynamic device fingerprinting to capture the device ID used for BNPL applications, helping detect bots and other fraudulent activity
Our platform also provides several more features tailored to help financial institutions prevent BNPL fraud so they can keep pace with this popular payment option without shouldering too-high risks.