As a new method of payment appearing next to an item’s price on a product page or at checkout, Buy Now, Pay Later (BNPL) is a growing category among payment options, especially online. It is a type of installment plan that typically lets consumers put down 25% of the purchase price then make three equal payments over six weeks. To offer this option, merchants have teamed with fintech providers such as Affirm, Klarna and Afterpay, although banks and credit card issuers offer their own plans as well.
According to a recent survey by online lending marketplace Lending Tree, about one-third of shoppers have used BNPL to pay at checkout. Of those who opted for such financing, 62% said they had done so five times or more, and 81% said they would do so again. Clearly, BNPL is popular.
2 Types of BNPL Options
Not all BNPL options are created equal. There are two main types of plans: merchant transaction-fee loans and shopper interest loans.
- Merchant Transaction-Fee Loans
Merchant transaction-fee loans are straight installment loans provided to the customer at the point of sale. No interest is charged to the customer as long as they make their payments on time.
Instead, the merchant is charged a transaction fee by the BNPL provider, typically between 2% and 8% of the purchase amount, and in some cases a small per-transaction fee is added. Some merchants consider these fees acquisition costs — the added cost of acquiring a customer who otherwise would not go through with a purchase.
- Shopper Interest Loans
With shopper interest loans, no fees are charged to the merchant, but the customer pays interest as part of their installment plan. This option makes BNPL more attractive for merchants, since there are no upfront fees, but it is less attractive for customers.
Risks of BNPL
The BNPL market is growing because the payment option appeals to shoppers, especially younger ones, who prefer the nontraditional fast application and decision-making process — right within the e-commerce site or shopping app.
But borrowers have not been able to keep up with payments, which means more risk for everyone, including merchants. According to a recent study by Credit Karma, 34% of consumers who used BNPL services fell behind on one or more payments. Younger shoppers were far more likely to fall behind, with more than half of Gen Zers and millennials reporting that they missed a payment versus 22% of Gen Xers and just 10% of baby boomers.
Additionally, many product areas of BNPL are relatively unregulated compared to other forms of consumer credit, and not all BNPL providers report consumer payment behavior to the credit bureaus. This creates risk for the BNPL providers as well as for the merchants who rely on them to deliver more and more-paying customers. If a customer is shut off from BNPL options, they might not buy.
Fraudsters might use classic phishing schemes to get victims to provide their account credentials to a BNPL provider, like Affirm, Klarna or Afterpay. Then, with these credentials, the fraudsters can take over the account and log into any e-commerce site or app that accepts that BNPL provider and make purchases using the victim’s account.
Whereas consumers might have email, text or mobile alerts associated with a credit card, alerting them to spending — authorized or otherwise — they may not be aware that there has been a takeover of their BNPL account, because they aren’t billed immediately. Fraudsters can do quite a lot of damage before fraud is uncovered.
When merchants use legacy solutions, they don't realize that they assume all fraud liability and are solely responsible for the risk. The good news for merchants is that most BNPL providers accept liability for the financial cost of fraud when incidents like these occur. Merchants can also stop BNPL fraud from happening in the first place by recognizing the following:
- New and unusual purchasing behavior
- Logins from new devices or IP addresses
- Multiple large transactions within a short period of time
- Changes to the shipping address
Merchants need more oversight into these unusual account or shopping behaviors, perhaps using a range of automated anti-fraud tools to review and flag orders.
BNPL and Digital Identity Solutions
Besides merchants becoming more vigilant over customers’ digital transactions, BNPL providers also need to increase their investment in digital identity solutions. Aside from the digital signals already cited, BNPL providers have the opportunity to investigate any unusual data provided by customers applying for a BNPL installment plan, such as phone numbers, email addresses or device IDs. Stronger oversight and flagging of potentially fraudulent behavior allows BNPL providers to make lending risk assessments more accurately.
While the market might be hot right now for BNPL solutions, stronger lending decisions and lower fraud will create a more trustworthy environment for both merchants and their customers.
Mitigate Risk With Instnt
Instnt is the only customer acceptance service that provides performance guarantees for each good customer accepted. Unlike other competitors, Instnt assumes the liability for fraud which allows merchants to experience growth like never before without any of the negative effects of widening their sales funnels. For more information on Instnt’s innovative solution to an age-old problem, start your free demo today.