Upfront, let’s stipulate that Buy Now, Pay Later lending is a good consumer credit option for some, but also agree that the fintech “no interest, no interchange” mode is not as free as it suggests, nor is the credit quality bank-grade. With the holiday season ahead, we will likely see increased fraud, not just increased credit risk.
In the mainstream BNPL model, there is no question about the incremental risk of ignoring established credit scores and embracing thin credit files. Today, the focus is on fraud. Bank card issuers are sensitive to fraud, particularly as they soften lending standards and card-not-present (CNP) transactions grow. With lighter credit standards, BNPL experiences higher risk, as CNBC mentions in today’s read.
Buy now, pay later services aren’t just popular among consumers. They’re also proving to be a hit with criminals.
It is tough enough to fight fraud when you have sound credit underwriting. Regulatory standards to ensure you “know your customer” (KYC) and that they have the “ability to repay” (ATR) help vet out many criminals. But certainly not every crook gets caught.
Fraudulent activity is on the rise at some of the largest buy now, pay later (BNPL) platforms, experts say.
Criminals exploit weaknesses in the application process for BNPL loans and steal items ranging from pizza to video game consoles.
Warnings of BNPL fraud are particularly timely as Black Friday kicks off the critical holiday shopping season next week.
One of the vulnerabilities, Rehak says, is BNPL firms’ reliance on data for approving new clients. In addition, many companies don’t conduct formal credit checks, instead of using internal algorithms to determine creditworthiness based on the information they have available to them.
Merchants get nothing but risk in a fraudulent transaction. Sometimes the cases are too small to pursue, which leaves the BNPL lending process even riskier.
“There’s going to be a huge amount of fraud hidden in there because they always lower their security checks during those events because they don’t want it to impact sales,” Gottchalk said.
Unlike credit card companies, the bulk of BNPL companies’ revenue comes from merchants. Companies like Klarna and Afterpay charge retailers a small fee on all transactions processed through their platforms.
The key selling point for merchants is that they often see their sales volumes increase as a result. Unfortunately, this has led to concerns that BNPL plans are encouraging consumers to live beyond their means.
Recent developments by Mastercard and Visa in installment lending, the entrance of PayPal as a BNPL provider, and BNPL offerings by processors FIS, Fiserv, and TSYS, will fortify BNPL borrowing for banks. But until then, fintechs must keep their eye on the ball. Sure, December will bring incremental sales, but January will increase fraud, and February will bring more credit risk.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group