The Buy Now Pay Later (BNPL) concept isn’t completely new, but combining the idea with a mobile payment app and as an option at checkout has certainly connected with shoppers in the UK and US: more than a 1/3 of shoppers in the two countries are using it, including half of Gen Z and the millennial generations. What is BNPL and why is it so popular? Is there a fraud dimension to it? BNPL is currently the fastest growing online payment method in the UK, with a growth rate double that of bank transfers and more than triple that of digital wallets. Klarna appears to be the market leading BNPL app, boasting hundreds of thousands active monthly users. Merchants have taken notice, as have our "friends" in the fraudster community.
What is behind the sudden popularity of Buy Now Pay Later apps?
The reasons for the BNPL boom are several and quite interesting. Users are attracted to the feature of receiving their purchases right away while organizing repayment over a period of weeks or months. In some cases it serves as a supplement to credit cards; in many cases BNPL serves as an alternative.
BNPL is most popular amongst millennials, who prefer to have a selection of payment options and are quick adopters of new payment technologies. A whopping 54% are currently using this payment method. Millennials and gen Z have definitely shown an aversion to credit and a willingness to adopt alternative payment methods, particularly BNPL. Younger generations look at BNPL as a budgeting tool, and many see credit cards as an easy way to get into debt. Merchants have taken notice when studies have found that millennials and Gen-Z spend 44% and 72% more on orders if BNPL is available as an option.
According to a recent survey, ease and convenience is the number one reason for use of BNPL (44% of respondents). Imagine trying to negotiate with a cashier at a brick and mortar store -- “Hey I can give you half the money now, and I’ll come back in a week and give you the rest. I might forget, or I might be short on cash, but don’t worry about it, I’ll just pay it later.” The BNPL plan takes care of that conversation for the user. Surveyed users also pointed to other reasons for their preference for BNPL: the ability to spread costs over time, interest-free payments, and the ability to pay for purchases that individuals couldn’t afford otherwise.
BNPL is attractive to lower income customers too, allowing them to pay off a purchase in 2, 4, or multiple installments. BNPL apps and services also skip the checks required of credit card applications thus significantly lowering the bar to entry. This empowers customers that would otherwise be deterred from making purchases. COVID's impact on income was undoubtedly an accelerator of this trend.
Some experts even point to the 2008 economic downturn as a reason for the success of BNPL. Today’s younger generation of shoppers grew up during the economic recession and were of course influenced by its effects. Credit card debt became associated with the economic downturn, encouraging shoppers to seek out more inspiring options. A recent survey found that ⅔ of millennials do not have a credit card. Credit card-related reasons dominated in the list of decisions to use BNPL. Respondents in the aforementioned survey found BNPL useful because they were able to borrow money without a credit check, don’t like credit cards, can’t get approved for a credit card, and/or their credit cards were maxed out.
How Do BNPL Services Work?
BNPL plans are alternative credit options which allow you to delay or spread the cost of your purchase into potentially interest-free instalments, which could be helpful to users with tight budgets. It can also help with purchasing multiple items or sizes at the same time or delay payments until after the customer's payday. The user can choose a BNPL service as a payment option, at the time of shopping checkout. The BNPL provider does a quick check (not a full credit check in most cases), and when the checkout is completed, they pay the merchant in full. The user then has to pay the BNPL provider back in a series of installments. The available options for timing of repayment depend on the BNPL provider’s offering. There are a number of plans being offered to users, all under the blanket term of “Buy Now Pay Later.” The Merchant Risk Council blog provides a helpful list:
- Pay for specific purchase via an installment loan
- Application made as part of the checkout process
- Instant decision made based on innovative credit scoring
Pay On Invoice
- Typically consumer agrees to pay within 14 days
- Payment provider pays merchant immediately and then collects funds from user
Approved Credit Line
- Apply for credit directly from popular wallet providers
- Credit given prior to any specific purchase There are a number of BNPL apps in the market now. I’m certainly not recommending one over the other, but just want to give you a sense of what’s offered in the market.
Pay L8r is one of the more popular BNPL apps. They offer a “Speedy” option to pay for the purchase in 30 days, or to split repayments over a payment period of 3 to 12 months (with interest). Users can customize the timing of the repayments.
Klarna appears to be a market leader. They offer users the ability to split the cost of the purchase into 4 payments, paid every 2 weeks with no interest.
Laybuy allows you to pay for your purchase weekly, without having to pay any interest over the course of six weeks.
Clearpay allows users to purchase items online and repay in four instalments, interest-free. They instruct the user to select Clearpay as the payment method at the moment of online checkout, at which point the user is required to fill out a quick form. The user then receives a decision on whether or not they’ve been approved.
PayPal offers interest-free payments with “Pay in 4.” They promise a decision in seconds after you apply for the service, and if accepted the user gets “the security and protection you expect from PayPal.” Users can manage the various purchases through the PayPal app.
What are the risk factors? Is “buy now pay later fraud” a thing?
What are the costs of the BNPL payment method?
One of the main selling points of BNPL is its convenience and ease. To sign up, a user only needs a few pieces of information -- a name, email, date of birth, mobile and a billing address -- and then the decision is typically quite fast. As you might expect, fraudsters take advantage of this by signing up for BNPL services in legitimate users’ names. The scam works by crooks stealing your personal details and then using them to create accounts with one of the BNPL providers.
And of course there is Account Takeover, commonly abbreviated as ATO, with which we at Nethone are quite familiar and even designed a product to address it. Fraudsters will attempt to gain access to users’ already existing accounts by attacking weak passwords (which are common) and/or buying stolen credentials from pastebins on the darknet. BNPL service providers assume the liabilities in the event of fraudulent transactions, so the user and the merchant are covered. BNPL service providers have to manage fraud levels because they are on the hook for chargebacks if purchases are made with stolen credit card info. But there’s a potential risk and cost for merchants here too -- in the case of fraudulent transactions, to whom will the customer turn for a solution and blame? The merchants will have to deal with the problem, even if they are “blameless” in the situation. So merchants need to quickly build up the customer database when little form data is provided.
Another risk is assumed by the BNPL service providers themselves -- in the end, will the user pay? BNPL providers need top notch analysis of users that is not dependent on form data and credit card checks.
BNPL shares another risk factor with many of today’s shopping and payment platforms: fake companies offering fake and/or stolen products at drastic discounts. As a side business, such fraudulent sites also harvest and sell their users’ personal and payment data to other fraudsters.
BNPL is here, so deal with it
Nethone makes anti-fraud software applications, so we are well acquainted with the challenges of preventing Account Takeover and other scams tied to new and classic payment technologies. BNPL is a new spin on an old idea, but it has resonated with a lot of shoppers, especially the valuable Gen Z and millennials users, so it should be carefully considered by merchants as a tool for growth. It’s obvious that BNPL service providers need top notch Know Your Users style assessment given that the checks that are performed on classic transactions do not apply to BNPL. A robust Machine Learning-based anti-fraud solution can certainly help BNPL providers and merchants gain a deep understanding of every single user session through behavioral patterns, device info, biometrics, and interaction history.
For additional expert discussion of Buy Now Pay Later, check out Episode 3 of The Exchange Podcast.