E-commerce has revolutionised how we shop and manage our finances. We no longer need to go to the store to purchase the items we want since we can purchase them online. However, what if our favourite products are just a few clicks away but out of reach financially? We want what we want and when we want it. Hence, the "Buy now pay later" financial scheme has recently gained popularity. The demand for it is at an all-time high, with many using the opportunity to acquire products before they have the funds. It does, however, come with risks.

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What is BNPL?

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BNPL, or Buy now, pay later, is a type of payment process that allows customers to purchase a product or a service online without cashing out the total price at the point of sale. Instead, the customer pays a fraction of the cost at checkout, and the rest they can pay later in instalments or as a lump sum. Research from The Ascent showed that over one-third of American adults had used these services by 2020, and the number doubled by March 2021, expected to grow even more in the next few years.

Paying these instalments usually comes at no extra cost, making it more convenient for customers than a typical credit or loan option. Often, these services do not require credit checks, making them accessible to people without credit histories, low credit scores, or no access to traditional financial services.

Unsurprisingly, this makes it extremely popular among younger audiences as they still haven't been able to build up their credit history, with 54 per cent of Millennials and 50 per cent of Gen Z using BNPL services. Although these services can be excellent financial tools for many people, they pose various dangers to customers, merchants, and financial institutions offering them. For this reason, proper tools must be used to ensure everyone's safety.

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Facing the risks

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While it has already been present for a few years, it only recently rose in popularity, accounting for 2.1% or $97 billion of all e-commerce transactions in 2020, and is expected to double by 2024. As a result, E-commerce will continue to grow, and with it, BNPL solutions meaning BNPL risks, are here to stay. As a result, these solutions can be risky for customers, merchants, and BNPL providers.

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Risks for the customers

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On the one hand, using BNPL solutions can give customers an option to purchase items or services they need. On the other hand, if customers are unaware of their limitations, they may end up overspending or in debt. The application process is easy, with almost instant approval, making people jump in before thinking it through.

For example, if you have been dreaming about those $400 shoes for a while, by using BNPL now, you can get them for only $100, which you happily accept. However, have you considered that this means you will have to pay $300 more in future instalments? Unfortunately, some people get blinded by their ability to afford something they couldn't before and forget they will need to pay off the rest eventually.

Therefore, before paying with BNPL, it is good to yourself these questions to prevent or minimise the risks:

1. Is the purchase necessary and one you won’t regret?
2. Is BNPL the only way you can afford it?
3. Are you confident you can and will make all the payments on time?

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Risks for the merchants and BNPL providers

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While customers face the dangers of overspending or debt, the risks differ for merchants and BNPL providers.

The most common dangers are:

1. New Account Abuse
2. Synthetic Identity Fraud
3. Account Takeovers (ATOs)
4. Fraudulent Chargebacks
5. Transaction Laundering
6. Trojan Horse Fraud
7. Never-Pays Fraud

Regardless of these dangers they face, the consequences are the same - financial and reputational damage that will impact merchants and BNPL providers in the long term. Luckily, these risks do not have to become a reality when using proper tools such as credolab and SEON solutions. Instead, they allow you to minimise these risks, which is essential for any provider that wants to continue providing efficient services to their customers.

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Mitigating the BNPL risks

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Facing BNPL risks can damage account holders, merchants, and providers, which is why everyone must be aware of the dangers and the proper steps for mitigating them. This is especially essential since the industry currently has very limited regulatory oversight. While this changes, it is vital that necessary steps are taken, and the right tools are implemented to ensure the safety of their customers and the business.

With BNPL's popularity growing among customers, the dangers will keep getting more sophisticated and harder to trace. Creating an effective security strategy designed to adapt to anything criminals and fraudsters throw at you is the only way to mitigate these risks. This will protect your business and customers, and the following three steps can help you do that:

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1. Implementing rule-based risk assessment

This allows your security system to analyse historical user data to identify any potential fraudulent behaviour and create a set of rules that will be able to prevent it. Historical data leaves you blind to any new danger, which is why SEON uses machine learning to improve risk assessment. This is the first step in determining the risk factors of your customers and blocking the ones that might present a danger.  

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2. Using real-time data enrichment

Rule-based risk assessment is an excellent first step in security strategy, but it is not enough since it creates rules from internal data. Through SEON's data enrichment, you can access data from external sources using the user's email address, IP address, or phone number. This allows you to get a clearer picture of the user and whether they are a legitimate customer or a fraud. When combined with credolab, this data can be used to calculate real-time credit scores ensuring the BNPL provider doesn’t become a victim of fraudulent activity such as Never-Pays Fraud.

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3. Using custom rules

Fraudsters constantly change how they conduct their attacks, making them harder to detect and prevent. This is why the security strategy must not be static but adaptable and customisable. SEON utilises customisable rules that grow with the need and ensure you are never caught off guard with any new types of online dangers that might arise.

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Conclusion

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There are still a large number of people who didn't have the opportunity to become a part of the economy. There are several reasons why this might be the case. For instance, their country’s financial systems aren't as developed, they lack education or finances, or they are part of a marginalised group, like women in some countries. Whatever the reason is, the fact remains the same - they need BNPL and similar revolutions in the financial world to change their lives.

The financial world is changing, and more and more people are getting opportunities to become a part of it. There is no doubt that BNPL solutions can benefit many people, but they must be used with proper security strategies to ensure all parties involved are protected. With innovations that SEON and credolab can provide with security, BNPL solutions can continue to grow safely and reach even more people.

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