By Alexander Hall, Founder, Dispute Defense Consulting
Buy Now, Pay Later (BNPL) is hot! The new online payment method that enables consumers to pay in (many times) interest-free installments has become increasingly common on e-commerce checkout pages. And its popularity is exploding with shoppers—especially during this year’s holiday season. Gen Z consumers (18 to 32-year-olds) are turning to it in droves. Merchants are responding to the desires of their youngest, most energetic customers, and, at the same time, often reducing shopping cart abandonment rates and increasing average order values (AOV) with BNPL.
With dozens of BNPL providers competing for both sides of the market in different geographic areas, merchants all over the world have decided—or soon will—which BNPL provider to select for their business and customers. But they will need to consider factors including the geographic reach of the provider, the consumer profiles that use each type of service, and especially risk.
What is BNPL?
Merchants can add BNPL to the list of payment methods they accept, such as cash, check, debit or credit card (in-store), debit or credit card (online), Paypal, other wallets, etc. As time goes on, we expect these options to become integrated in our shopping experiences, both online and in-store, and we will all become more familiar with them.
The payment process for BNPL is similar to financing but doesn't involve credit inquires or limitations. There are a few subtle differences in execution between the leading providers, as well.
The average process flow goes like this:
A customer engages with the merchant’s website by building a cart and proceeding to checkout. The customer clicks on "Buy Now, Pay Later" and a screen guides them through the process of establishing an account with the provider, ultimately finalizing the transaction with the provider.
On the front end, this process is intended to be as seamless as possible. The value add for the merchant is to allow customers to make purchases that can be paid off over time, and typically doesn't involve any credit inquiries. Again, similar to financing, but with fewer restrictions.
On the back end, merchants can expect full payment from the service provider and the service provider will collect the installment payments directly from the customer.
This is the concept from a high level and there are several iterations that I've come across in my research depending on the provider that a merchant speaks with. Now that we are caught up on how the gears move with this particular method, we can move on to fraud prevention, liabilities, chargeback processing and best practices.
How is fraud handled with this new form of payment?
In this setting, fraud prevention is a collaborative effort. Starting from the end of the process and working our way back upstream, you will see how different elements require some processes initiated by the merchant and some initiated by the provider.
Chargebacks are received by the provider (not the merchant). This is because the installment payments are being collected by the provider, thus the disputed charges are between the provider and the customer. Typically, the chargeback information and financial responsibility will be passed back to the merchant.
Some service providers offer flat rates for chargeback protection. This is especially valuable to merchants who are considered "high risk" by payment processors.
Once the chargeback is received by the merchant, it is their responsibility to provide data relevant to the representment. This is where the collaboration comes in: Because the provider entered the process at checkout, there are several data points that are outside its scope.
For example, historic data on a customer account might show a history of noted chargeback abuse (or 'Friendly Fraud') for transactions that were handled through traditional methods. Another example might involve account takeovers on the merchant's site, and payments processed with a stolen card through the providers' payment system. This would illustrate the need for device fingerprinting and 2FA on the merchant side to stop this from happening in the future.
Moving on from chargebacks, we look at when a fraudster originates a transaction by making a profile, selecting the BNPL option, receiving the product and not paying at all. In this example, the merchant relies solely on identity information, and the provider is reliant on the payment information that is entered for future payments.
These are the most obvious methods I would expect to see play out over time.
Suggested fraud prevention tactics when employing BNPL
I have worked with around 20 service providers in the fraud prevention space including those engaged in transaction analysis, identity verification, device fingerprinting, biometrics, chargeback representment processing, Dark Web analysis, and more. Each one has an effective offering, centered around the area (or areas) they chose to focus on. There are many combinations and suites of offerings that can be considered "the best" based on the needs of a company, so I suggest that all readers do their research and decide what is best for them.
That being said, I am a firm advocate of the use of as much PII (Personally Identifiable Information) as possible aggregated through an expansive, qualified network.
This type of information is easily leveraged during many touchpoints across the customer experience journey. The inclusion of social media has been growing in value when forming chargeback representments. Timelines of PII data points can be used to make determinations on various requests, and the list goes on.
By employing an identity verification provider as a baseline for your fraud prevention, you have an effective starting point. From here, you can look into offerings that are more suitable for your company's circumstances.
As merchants grow and adapt to keep up with trends relative to the customer experience journey, there are new challenges to keep in mind. Each challenge has a solution, and I hope that I have helped to shed some light on what merchants can expect when employing BNPL, the challenges that come along with it, and what they can do to strike and maintain the balance between merchant security and customer satisfaction.