Guest Column | April 7, 2022

The Underlying Risks Of ‘Buy Now, Pay Later' Solutions

By Diana Barris, Forter

Risk GettyImages-1165478951

Buy now, pay later (BNPL) solutions are growing rapidly in popularity as massive online retailers, including Amazon and Ikea, have jumped in to offer these options. BNPL solutions are expected to grow to 10-15x of current volume by 2025, with some estimates exceeding $1 trillion in annual gross merchandise. More consumers are looking to big-name BNPL solutions providers to alleviate the financial stress of making big purchases all at once. On the contrary, retailers offer BNPL in hopes of seeing fewer abandoned shopping carts and more significant purchase totals. To understand how to make informed decisions surrounding BNPL, consumers and retailers must understand the risks involved. 

Types Of BNPL Solutions

While there are many terms used to describe BNPL solutions, some of the most common include split payments, point of sale financing, and pay-in-3. They aim to bring a more seamless and convenient purchasing experience to the consumer by offering a flexible payment solution through installments. There are technical and distinct differences between the financing products and providers. Some providers offer regulated BNPL options, and some do not. Some providers develop consumer-facing products, while others work behind the scenes.

There are different ways retailers can provide direct-to-consumer solutions. Typically, the first payment is made at checkout and followed by four interest-free installments that are deducted automatically to avoid late fees. Some BNPL providers offer point of sale (POS) financing, where the consumer is subject to a credit check and small interest rates. If there are missed payments, the consumer’s credit score can be impacted. 

BNPL solutions are simple and easy to use but also can result in accumulated debt or consumers spending more than anticipated. Retailers need to make the best choice to enhance online sales conversions while improving the customer experience. Many BNPL providers follow different business models divided into two categories. 

Direct-To-Consumer Solutions: Direct-to-consumer (D2C) BNPL providers are what consumers typically associate with large online retailers as these solutions are offered directly to consumers through their marketplaces. These companies are consumer brands. Even though they are on the retailer’s site, the consumer pays when using a D2C provider, resulting in the customer becoming the D2C BNPL company’s user. These are considered third-party providers and are what people typically associate with being big-name solutions providers. 

White-Labeled Facilitators: There is another type of BNPL provider that facilitates bank-grade white-labeled BNPL programs. These companies allow retailers to offer their own unique branded BNPL solution that is part of the online customer experience. Unlike the D2C providers, white-labeled facilitators are entirely behind the scenes and from the back end. These platforms connect banks and lenders to merchants to provide the technology necessary to deploy the BNPL at the sale. The merchant takes no risk and can work with lending banks they have existing relationships. 

The Unknown Risks Of BNPL 

 While most consumers understand that BNPL can result in debt accumulation with missed payments and late fees, there are some additional unknown risks that they may not be aware of. The concept of layaway has existed offline for decades, but BNPL serves as a fast and convenient method of payment, making it a prime target for fraudsters. Some risk factors to consider include regulation pushback, fraud risks, and data ownership. 

Confusing Regulations And Third-Party Involvement: While there are some BNPL providers with strict regulations, this does not apply to all BNPL providers. According to the Consumer Financial Protection Bureau, some BNPL products do not provide clear disclosures that could be required by law in some states. Although BNPL applications may look comparable to credit card applications, they don’t have the same protections. In fact, many BNPL companies fail to provide dispute resolution protections. White label BNPL providers partner with financial institutions for financing, so they most likely won’t be impacted by regulatory pushback as these providers already operate within a set regulatory framework. 

Data Protection And Privacy: One of the most notable risks of a consumer sharing their personal information with a direct-to-consumer BNPL provider is sacrificing data to the third-party provider. This means that BNPL lenders have access to personal information and are sacrificing privacy. The provider can harvest this data and push advertisements to the consumer. The data is most likely being used to monitor behaviors that can increase profitability, but the lack of transparency creates risk for the consumer. Many third-party organizations involved with BNPL providers are companies with expertise in data analytics, risk protection, and automation. These companies operate to mitigate risks and make quick decisions in real time. 

Fraud Risks: As more significant retailers adopt BNPL options, there are many ways in which fraudsters can take advantage of these systems and their lenient authentication mechanisms. 

Fraudsters know how to find the weak points and search for vulnerabilities. Individual fraudsters and more extensive networks of hackers aim to target the weak points in BNPL loan approval processes. 

Many BNPL solutions require soft credit checks to verify the user's identity; however, these checks are unlikely to notice potential fraud indicators such as a misspelled name or phone number. They can create fake accounts to exploit different lines of credit and implement phishing tactics to gain control of personal information. In addition, many fraudsters may also create fake accounts to exploit small lines of credit to take over existing users' accounts.

Many BNPL transactions lack the security features that traditional financing and credit card companies have. These systems need machine learning algorithms that adjust to fraudsters taking new entry points. A real-time fraud prevention solution that utilizes AI and machine learning technology can respond quickly and identify fraudulent transactions as they occur.

BNPL Solutions And Mitigating Risk

Checkout is the goal, and BNPL solutions are helping retailers increase cartloads and improve customer loyalty. Although BNPL solutions come with hidden risks such as concerns about regulation, fraud challenges, and data privacy, BNPL provides an easy, user-friendly way for consumers to make larger purchases. The BNPL industry is gaining momentum as U.S. e-commerce purchases have continued to skyrocket since 2020. Ultimately, these solutions offer payment term flexibility in a new way that gives consumers more time to make payments – and we can expect them to continue their ascent.

About The Author

Diana Barris is Sr. Product Marketing Manager at Forter.