How To Stay Risk-Free as a "Buy Now, Pay Later" Provider

The digitalization of the payments industry has given rise to many new forms of payment, a popular one being, the "buy now, pay later" (BNPL) industry. BNPL is offered through a segment of FinTechs as a new method of payment. BNPL has opened up a world for new payment possibilities for consumers and businesses alike.

A recent research study has measured the BNPL industry as worth $3.7 billion in the UK alone and offers new flexibility to consumers. The option to spread payments over time, rather than a large upfront one, makes this method highly appealing for those with tighter budgets. By providing customers with the BNPL services/options, retailers gain access to a larger pool of buyers and perhaps an increased demand for higher-priced products.

As attractive as this may sound, BNPL comes with inherent risks that both businesses and consumers should consider. Fortunately, there are ways for firms to mitigate these risks...

What Is "Buy Now, Pay Later"?    

The online shopping experience has changed vastly over the last few years— the introduction of  BNPL payments being a large part of these changes as a new payment method (regardless of good credit). As an online shopper, BNPL is a method of payment that typically appears in the checkout stage of the transaction or as a note alongside the item's price that provides shoppers with the option to purchase an item in multiple installments. For younger consumers, the BNPL benefit is especially compelling when looking to buy goods or services generally outside their average price range.  

Generally, using BNPL alternatives only requires a payment of approximately 25% of the total price of the item upfront. The remaining balance is then paid off in equal installments over the next few months with no fees or interest charges.

This type of immediate, no-cost financing has become increasingly popular throughout the COVID-19 pandemic. While some may use it to stretch out payments (into monthly payments paid at a later date) for necessities and everyday living expenses, others are excited to buy big-ticket items without paying the total amount upfront.

Also considered a type of short-term loan, these payment options are popular among consumers (most commonly, younger consumers) who don't qualify for a credit card or prefer an alternative financing option that allows them to spread out payments.

The Future of Buy Now, Pay Later: The Risks of Offering a BNPL:

Products with an option for BNPL involve borrowing money. While the process of borrowing and loaning money happens every day—from applying for mortgages to securing a credit card—this specific use of new payment alternatives like BNPL transactions applies most regularly to everyday items like fancy espresso machines or new clothes. However, BNPL transactions that fail to result in a positive outcome can result in accumulated, unaffordable debt for society's most vulnerable and lost profits for businesses.

The BNPL services are similar to common forms of payment such as personal loans or zero-interest credit cards but differ in that they're much more accessible. So much so that many people have started treating them as an alternative to their everyday credit card. However, while those customers may originally intend to make timely payments, sometimes unplanned situations arise that negatively impact their financial health, ultimately preventing them to take advantage of the perks of BNPL. This was the case for so many during the economic crisis of the Covid-19 pandemic.

Inability to make payments on BNPL purchases leads to bad loans and other negatively associated impacts. The critical problem is how accessible the BNPL option is. With the button typically located among the payment methods on checkout pages, most users are unaware that  BNPL essentially holds the same implications as taking out a loan.

Quick Lending Decisions & Regulatory Issues:

Experts predict that the BNPL industry could quickly become more problematic than helpful if left unregulated. BNPL regulations are in the early stages, including newly proposed UK regulations to protect consumers that may help form a blueprint that mitigates bad loans in other countries and markets.

Approving BNPL purchases from customers who don't fully understand the implications of the purchase is a big problem for businesses that need to quickly and accurately gauge the ability or intent to pay.  While regulations are still on the horizon, mitigating risk and protecting consumers from bad debt is already something the BNPL industry is tackling. The challenge is that many bad loans come from first-time buyers who may not have much credit history to inform a quick lending decision. How can businesses try to solve this issue? By tapping into digital identity intelligence.

The Best Way to Offer BNPL?: Digital Identity & Security Solutions:

Digital identity solutions help BNPL providers improve their knowledge of customers in transactions where the cardholder is not physically present. Highly prevalent to online retailers that sell merchandise through their e-commerce store.

Using data signals tied to a customer's online presence, like phone numbers, email addresses, or device ids, allows a company to make lending risk assessments more accurately. Phone numbers are a uniquely powerful source of digital identity, as they bridge the physical world with the online world by creating an authoritative connection to help organizations better identify customers.    

Any business considering implementing BNPL payment options should consider using a digital identity solution to:

• Ensure contact details obtained are correct so your business can reach customers and offer better support, especially when there are financial red flags.
• Contend with more nuanced purchase situations. For example, a teenager who uses their parents' records to purchase but provides their phone number to verify the one-time password.
• Cross-verify contact details on an application with machine learning data technology that finds inherent data behind a customer's phone number to better understand BNPL applicants.

How TeleSign Makes BNPL More Secure for Retailers:

TeleSign’s digital identity solutions deliver risk intelligence from a global network of hundreds of thousands of unique consumer insights and data points to help organizations take proactive measures to protect their customers and themselves while maintaining privacy, trust, and growth.      

TeleSign helps BNPL providers stay secure by:

1. Providing profile coverage of buyers who may be first-time buyers or do not have any credit records.
2. Validating consumer phone numbers and ensuring the phone number is associated with the same person attempting to complete the transaction.
3. Running an automated phone number-based risk analysis across more than 9 billion global phone numbers.
4. Verifying details provided by new users versus the mobile operator consumer data.
5. Validating these users by gathering further information based on phone status, account history, and digital activity history.
6. Cross-verifying provided contact details in an application with phone number ownership data.
7. Validating provided information and quality of the phone number itself.
8. Checking the reputation of the phone number for suspicious activity or origins; and
9. Preventing "intent of non-payment" and fraud by gauging the risk of each incoming loan request.

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Read more about how we help businesses here: https://www.telesign.com/customers/affirm