There is no way we can talk about the world without mentioning the impact the global pandemic has had on customers’ spending habits. Many high street retailers have closed some of their brick-and-mortar stores, while others have even disappeared completely from shopping centres, instead reinventing themselves as online-only and changing what they have on sale to entice buyers to continue spending with them. Black Friday, Super Saturday, Cyber Monday, Singles’ Day, holiday season… It seems there is not a single day (pun intended!) in the calendar that isn’t dedicated to shopping and encouraging customers to spend, spend, spend. For those rare days that are not dedicated to shopping, there is always a special offer or a once-in-a-lifetime deal to be had at one of the many businesses operating online – and who would want to miss out on a deal of a lifetime?
What we have seen during the pandemic is online transactions continue to grow, with our LexisNexis® Risk Solutions Cybercrime Report suggesting that consumers are relying on e-commerce shopping capabilities more than ever before. Not only that – the recent surge of Buy Now, Pay Later (BNPL) offerings does not show any signs of slowing down either. There are many benefits to consumers using flexible payment options, but there are also certain aspects of BNPL that need closer inspection.
BNPL started gaining popularity due to a multitude of factors. Consumers can buy several items (sometimes the same item in different sizes), before deciding which to keep and which to return, without paying for all in advance. The simple concept of “see and try, and only then buy” has driven the transformation of consumer bedrooms into changing rooms, with this paradigm shift having revolutionised (especially fast fashion) sales, particularly as they come with easy returns via prepaid bags.
Customers love BNPL, because the concept of splitting a large payment into smaller, more manageable chunks without the excessive fees that come with traditional credit lines, is straightforward and therefore appealing.
Even if the fees were to be incurred across the product lifecycle – they are usually quite simple as there are no APRs nor complicated charges attached to them: just a small fee if the first payment is missed, or a total charge applied at the end of the multi-payment cycle. The variety of options makes BNPL an attractive offering for consumers who cannot afford large or lump sum payments.
Many BNPL providers offer one online account for all shopping needs spanning across various retailers – from electronics, through to clothing, beauty, home improvements and veterinary services. Having one account with a single view across all of the split payments and instalments can help consumers manage their finances better.
Retailers love BNPL because their checkout conversion rates go up with potentially greater ATV. That means their customer base continues to increase, as the sale offering can target previously untapped consumer pools. Additionally (and subject to the individual set-up) potential chargeback liability for fraudulent purchases can sit with the BNPL provider, rather than the retailer themselves, therefore shifting the risk and increasing the appeal of BNPL.
Some retailers partner with BNPL providers who offer online shopping accounts that can also serve their brick-and-mortar shoppers, further supporting high street merchants in the post-pandemic economic rebuild.
Nevertheless, it is imperative that BNPL providers offer the highest level of protection to buyers. An average shopper will associate all the responsibilities with the retailer. It is the shop that sells the goods, delivers them, and ultimately receives the profit from sales. If something goes wrong during or after the transaction has taken place, it is usually the retailer who takes the blame – for wrong items being sent, missed deliveries, incorrect charges, goods not received, fraudulent sales – the list goes on).
However, in the “customer-BNPL-retailer” dynamic, it is the BNPL provider who needs to ensure that transactions are processed in a safe manner and that consumer data is ultimately protected. This means the responsibility on highlighting safety and ensuring protection for the buyer falls on the middleman – BNPL providers – if they want to continue to provide services across the ecosystem.
Buy Now, Play Never – is the online consumer safe?
The easy way for fraudsters to get richer from BNPL schemes is through opening new BNPL accounts with stolen identity information that usually gets leaked from other e-commerce sites, where a trusting customer has provided their payment card data and personal information during a purchase. The ideal set of records (unfortunately!) is easily obtained on the Internet – name, address, card number – all the information a fraudster needs to open an account quickly. By associating a new email address or a phone number with previously good and trusted credentials, a fraudster can impersonate an unsuspecting victim. Some of the BNPL providers perform a soft bureau check to verify the identity of their customers, which might not be enough when looking at a combination of physical and digital data points. Traditional credit bureaus offer next to no insight into the digital aspect of a consumer’s identity; therefore, it is vital to overlay digital identity intelligence. This gives BNPL providers additional assurance through insight into a potential buyer’s digital footprint as well as their credibility and trustworthiness.
Try Now, Cry Later – is driving with the brakes on bad?
One of the most complex issues arising in the BNPL space is in relation to the affordability measures that are applied to customers. With other financial products, like a loan or a credit card, there are certain steps lenders need to undertake to give the consumer access to credit. They conduct checks on previous credit history and assess whether the applicant can actually pay back the loan. Each credit line is then added to the consumer’s credit file for other lenders to see and to take into consideration in future assessments. With each and every BNPL account (and even a sub-account) across different merchants, that traditional line of summed up credit has faded, meaning that the possibility of knowing if the transaction is feasible or not has also disappeared. BNPL providers do not know how many potential open credit lines their customers have. Since there is less scrutiny around opening a BNPL account, retailers will often rely on the borrower-lender-supplier settlement chain that shifts the liability away from them. Now – all that is well and good, until the retailer’s brand image gets tarnished as an easy target for quick cash-out activity via the BNPL channel. That is a dangerous combination for both parties in this agreement.
From an average consumer’s perspective, the lack of credit checks might be convenient, but it is also somewhat troubling, as, without proper controls around the number of BNPL open lines, it will be easier to fall into an overdraft or ever-increasing debt situation.
Additionally, as many BNPL products are provided by a third party middleman, there isn’t any protection (like Section 75 of CCA in the UK or Paragraph 179 of FCBA in the US, for example) that you would normally expect with standard credit lines such as credit cards or loans, meaning that consumers are often left to their own devices when it comes to claims or dispute resolution. Regulators across the globe are recognising this as a potential pitfall in the unsecured consumer credit market and are pressing for laws that can better support this form of lending (which is not sensu stricto lending per se), considering the impact of the pandemic, as well as new business models stemming from BNPL. *
To Buy or Not to Buy? – is there a way to get ahead of fraud?
BNPL providers and retailers can reduce the risk of reputational damage and fraud by ensuring they carry out enhanced fraud and identity checks at various points of the consumer journey – from account opening through to payment.
Fraudsters often use stolen identities of good consumers to open new BNPL accounts. So-called ‘soft’ credit or identity checks via a credit reference agency are unlikely to spot potential fraud indicators, such as the email address or mobile number not being linked to the applicant. Implementing tools that can check this in seconds without interrupting the application process, will help retailers as well as BNPL providers to spot and stop such fraudulent activity.
A major risk lies in BNPL providers processing transactions on cards without checking extra details surrounding the payment. As the card transaction contains a basic set of data (that often gets compromised), performing simple authorisation checks won’t solve the problem of fraudulent payments being processed. Only with the extra layer of near-real-time risk assessment, such as recognising bad devices or detecting behavioural anomalies in the interactions, will BNPL providers and retailers be able to tackle the ever-growing payment fraud problem in the e-commerce space. As a scheme overall, Buy Now, Pay Later comes with a huge number of options and offers for the consumer, as well as the retailer involved in the chain. However, BNPL requires all parties to be risk-savvy to guarantee satisfaction, assuring a consumer’s continuous willingness to spend, without exposing them to unnecessary risk.
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