Buy Now, Pay Later, or BNPL, as we refer to it in the industry, is a growing trend in online shopping.
But it is definitely not a new trend. Consumers have been using credit cards to buy things and pay for them over time for years. The only thing new about it is the path by which it is being accomplished. And, that BNPL loans don't come with the high interest fees of most credit cards. But, unfortunately, this path opens the door for fraudsters to exploit it.
There are several Fintech companies offering the payment option to merchants who want to remain relevant and compete with other merchants. AfterPay, Affirm, and Klarna are a few of the most popular providers you’ll see on eCommerce sites. But new ones continue to pop up as popularity climbs.
BNPL transactions accounted for between $20-$25 billion dollars in the U.S. alone last year. According to Kaleido Intelligence, a Fintech research firm, point of sale installment loans will account for $680 billion dollars in global ecommerce sales by 2025. And it is only going to continue to grow as younger generations age into the marketplace.
Currently, 80% of BNPL users are Gen Z and younger millennials. In addition, nearly 80% of all consumers have their account tied to a debit card for purchases.
How does BNPL work for merchants?
BNPL is basically an installment loan. BNPL providers install a button on an eCommerce merchant’s checkout page, giving the customer the option to make installment payments on their purchase. When the customer chooses to take the installment, the provider will do a soft credit check and approve the customer.
The provider extends the credit to the customer and pays the merchant up front for the purchase.
For customers, there is usually no interest as long as they pay it off in the agreed amount of time. However, merchants will pay the Buy Now, Pay Later provider anywhere from 3% to 5% of the purchase to have the service. Depending on the provider, merchants will also pay up to $0.30 per transaction.
Why offer a BNPL payment option?
At B.I.G., we are always advocates for offering multiple ways to pay. Consumers these days want to pay for their products whatever way is most convenient for them. For online merchants, if you don't yet do it, BNPL is one of those trains you're probably going to have to jump on.
The option to purchase a product right now, then pay for it over time, does many things for merchants and consumers alike. For consumers, high ticket price items that previously seemed out of reach are now attainable. BNPL allows consumers to pay in payments without worrying about the added interest they would have with credit cards.
The option helps merchants to attract a broader customer base and increase sales. It is especially appealing to younger generations who have an unsavory view of credit cards and shy away from debt.
Some BNPL providers will assume the risks associated with fraud and chargebacks. This can help merchants reduce their liability for fraud as well as their chargeback ratios.
Buy Now, Pay Later payment model:
Broaden customer base
Reduce shopping cart abandonment
More flexible payment options for customers
Increase average order value
Reduced risk of chargebacks
Opens the door to increased fraud
Give up access to customer data
There are both pros and cons of using the service for merchants and customers.
As a merchant service provider, we are familiar with merchants' opinion of the costs of accepting credit cards. This payment option is quite a bit more costly for merchants than paying credit card transaction fees. BNPL providers typically charge the merchant 5% - 6% per transaction, double the typical credit card interchange fee.
But, we also encourage merchants to offer their customers multiple and flexible payment options. The popularity of BNPL with consumers can't be argued with. And there's also no arguing with the fact that it helps merchants increase sales. The long-term success of our merchants is by far our main objective.
Merchants must weigh the increased costs to their bottom line against the potential increase in conversions to make the right decision.
Merchants that want to offer a BNPL option, must still focus on fraud prevention. Even though most BNPL providers accept fraud and chargeback liability, merchants cannot trust all fraud prevention to the BNPL provider. It is the responsibility of both the merchant and the provider to safeguard consumers.
Merchants must continue to employ a multi-layered fraud management approach. Monitor rules-based fraud detection and continue to screen orders for strong fraud indicators. Contacting customers directly when a transaction is flagged can help merchants nip it in the bud.
Buy Now, Pay Later firms are largely unregulated by the federal government. Because they accept payments, they do have to abide by Payment Card Industry (PCI) Security Standards. But that means they only have to follow the minimum requirements for data security. And they're not subject to stringent KYC rules the same way other lenders are.
No benefit to credit scores.
Making payments to a BNPL provider doesn't help buyers improve their credit. But it could hurt their credit if they're not careful.
The BNPL provider only does a soft pull of a consumer's credit when getting approved for the first time. This is good because it doesn't really affect the consumers credit. If you make all your payments on time, you’ll be in good standing with the company. But it won’t benefit your credit since they don't report to bureaus.
However, if you're late, or miss a payment, they will report that to the credit bureaus.
How can fraudsters exploit BNPL options?
Because fraud liability falls largely on the provider, merchants tend to lower defenses in favor of a quick conversion.
Account Takeover is one of the most common forms of BNPL fraud. If a fraudster gets hold of an account holder’s information they can make purchases at any retailer who accepts that BNPL provider. It can take a month before the victim realizes what happened.
Another common form of BNPL fraud is through creating fake accounts. Fraudsters create a fake customer account with the BNPL provider and make a small initial purchase to get approved. Once approved, and the customer is in good standing with the company after paying for the first purchase, they can make a purchase with little scrutiny. This time, they make a high dollar purchase using stolen credit card credentials. They are long gone and so is the product by the time the victim becomes aware of the fraud on their card.
And even though the breach happened with the BNPL provider, customers still tend to hold the merchant responsible. Most consumers who’ve been a victim of fraud will not purchase with that merchant again.
Customers can make payments even if you don't offer them.
Merchants don't have to offer a BNPL option for customers to take advantage of it. Some providers are going straight to the consumer to offer their services.
Klarna has created a way for customers to use their credit even if the merchant doesn't offer it as a payment option. Klarna created an app that can be used to make installments on purchases at both eCommerce and brick and mortar stores. Customers can create a virtual debit card, or “ghost card”, that can be used at checkout on eCommerce sites just like a regular debit card. Klarna pays the merchant and the customer makes installment payments to Klarna, per their agreement.
At brick and mortar stores, customers use the Klarna app to create a QR code that the associate scans for payment. Again, Klarna pays the store directly, and the customer remits payments to Klarna.
If you offer BNPL, safeguard your customers.
At Bankcard International Group, we focus on your challenges as much as your payment needs. We understand merchants need to balance fraud detection measures with purchase approvals. Merchants and payment processors alike must employ robust fraud detection and prevention without introducing more friction at checkout.
And we want to make sure you can offer your customers the payment options they prefer. If that payment option invites fraud, then we must find a way to close the door.
We take our client success seriously, and we take protecting customer data seriously. That’s why we offer cutting edge solutions tailored to support each merchant's individual needs. We offer fraud monitoring, chargeback prevention, and Chargeback ratio reduction assistance.
If you have questions or you’d like to learn more, call us today. Our ETA - Certified Payments Professionals are knowledgeable and ready to advise you on the best solutions for your needs.