Buy Now Pay Later
As technological advances pave the way for innovative new financial products, many consumers are avoiding the costly fees and interest rates of credit cards to seek out different ways to finance large purchases. This is especially true of younger consumers. Many merchants are partnering with “Buy Now, Pay Later” services to offer financing and installment payment plans to customers who are going card-free.
These services can increase your sales, but any time you expand your payment options you have to anticipate new scams and fraudsters to deal with. How can merchants keep safe from fraud and chargebacks when using BNPL services?
In some ways, BNPL is like a combination of a layaway plan and buying on credit: the buyer pays for the item in installments, but they get to take it home (or have it delivered) immediately. Services like Affirm, Klarna, and AfterPay allow shoppers to exercise the BNPL option at a wide range of ecommerce stores. Interest in BNPL services is booming—more than a third of US consumers have used it in some form, and its share of the global ecommerce market continues to grow.
Most analysts will cite bad credit or fear of credit card debt as one of the primary drivers of BNPL’s growth, and the generation that grew up in the shadow of the 2008 financial crisis has understandable reasons to be wary of big banks and their traditional credit instruments. BNPL allows these consumers to pay for big purchases in a manageable way. By partnering with these services, merchants can attract new customers and avoid shopping cart abandonment.
How Do BNPL Services Work?
With a third-party BNPL service, customers can choose it as a payment option, just as they would for services such as PayPal Credit or Amazon Pay. The BNPL provider does a quick credit check, and when the checkout is completed, they pay the merchant in full, and the customer then has to pay the provider back in an agreed-upon series of installments.
Some BNPL services offer a fixed number of installments, others allow the customer to choose the installment plan they prefer. Most plans run in the range of 3 to 12 monthly payments. Other providers use a somewhat different model; they might invoice the customer for repayment in full after a set period of time or they might extend a micro-loan to the customer at lower interest rates than the consumer would typically find with credit cards or payday lenders.
Customers are charged late fees if they don’t make their installment payments on time, and may be reported to credit bureaus.
On the other end of the transaction, merchants typically pay the BNPL provider between 2 to 8% of the purchase amount, and in some cases a small per-transaction fee.
What Kind of BNPL Fraud is Out There?
Account takeover is the most prevalent fraud risk for BNPL transactions. If a fraudster can obtain the login credentials for a victim’s BNPL provider account, they can log into any eCommerce site that accepts that provider and make purchases on the victim’s account.
Because they aren’t billed immediately, it may take the victim some time before they even realize they’ve been targeted.
The good news for merchants is that most BNPL providers accept the liability for the financial cost of fraud when incidents like these occur. However, customers still tend to hold merchants responsible (fairly or not) when they experience fraud, so it’s always in the merchant’s best interests to screen out orders that carry strong fraud indicators, such as:
- New and unusual purchasing behavior
- Logins from new devices or IP addresses
- Multiple transactions within a short period of time
- Changes to the shipping address
Merchants should reach out to customers whose transactions set off these alarms to confirm that they really intended to place the order. Automated anti-fraud tools may be employed to review and flag orders, but beware of relying too much on automation to block fraudulent orders. False positives are not uncommon, and you can alienate your real customers if you don’t take the time to manually review and verify them.
How Do BNPL Services Affect Chargebacks?
More good news: because the provider pays the merchant in a BNPL transaction, the customer cannot initiate a chargeback with the merchant. They can try disputing any payments they might have made to the provider, but in the vast majority of cases the provider will have made the customer agree to terms and conditions that would invalidate the chargeback.
BNPL providers know that while it’s hard to predict the reasons customers might give for fraudulent chargebacks, a well-crafted purchase agreement can serve as compelling evidence in chargeback disputes where the cardholder is claiming merchant fraud or error.
Just make sure you get customers to take some action to indicate their agreement to your terms, such as checking a box or clicking a link, so they can’t claim they were never informed.
Merchants should review each provider’s policies on merchant disputes before partnering with them. Most providers will not get involved or attempt to reverse a payment if the customer has an issue with the quality of the product or services they purchased.
Economic downturns, mistrust of credit cards and big banks, and increased awareness of the perils of consumer debt have created the perfect conditions for BNPL services to thrive. To some, their sudden popularity may be a little concerning—while they may not accrue the same high rates of interest as credit cards, consumers can just as easily overextend themselves on BNPL installments, and find themselves defaulting on snowballing payments.
Right now merchants are fairly well insulated from the risks associated with BNPL, and stand to gain much by expanding their customer base and selling more high-ticket items through BNPL purchases. Just be aware that as BNPL matures, so too will the scams and fraud attacks associated with it. Merchants should do their best to stay on top of anti-fraud news and update their defenses regularly to avoid getting blindsided by evolving cyber threats.