In an interview with PaymentsJournal at the 2021 Money20/20 event, Suresh Dakshina, Co-Founder & President of Chargeback Gurus, spoke about lowering disputes for Buy Now Pay Later transactions. The following transcript was edited and condensed for clarity.
Can you give us an overview of disputes within the BNPL marketplace?
The Buy Now Pay Later concept has been there for a very long time. HSN has been offering the Buy Now Pay Later for a very long time, but they didn’t offer it as Buy Now Later. It’s the [term] that was invented by the payments industry, and that’s gaining a lot of traction. With QVC and HSN, it was offered to clients that are regular patrons of QVC and HSN. They know who the customers are, they know what kind of products they buy, and they know the history.
So, when you’re offering it to your customer base, who are loyal followers, the risk is very minimal because you know them. Now with Buy Now Pay Later, the buzzword at Money20/20, we have seen more and more merchants inclined to offer the Buy Now Pay Later option. Initially, it was thought about for high dollar items–which is $500 or more. People cannot afford to pay right away, so why don’t I just offer this option so that it’s easy on them? And now merchants are also realizing if [they] offer the Buy Now Pay Later option, then the service provider who is offering the installment option is taking the liability. They are the ones… billing the merchant, they are billing the cardholder every single month, but the money goes to the merchant.
The problem with the current situation that I anticipate is you [merchants] are offering the solution to customers that you don’t know. They are not loyal followers. It can be Tim; it can be anybody on the planet who can opt for it. And I see a great growth opportunity to increase the revenue, especially for merchants who are selling high ticket items. Now you’re able to sell a lot more products and push your inventory out, which is a fantastic option. And there are a lot of players who are offering the solution. Mastercard was so intrigued about this, they are coming up with their own Buy Now Pay Later option. Some of the payment processors are also coming up with their own options for their merchants to work with because there is a good amount of revenue to be generated by this option.
Since we are on the risk side, I always wear my risk hat to see what kind of risks can persist in this area and how the merchants and providers can do it. One of the areas [I found] when I was digging in deeper, [is] there is no credit check being run on the cardholder when they are enrolling for Buy Now Pay Later. What it does is I might be a customer where I will buy a $1,000 item from, for example, the largest electronic store.
Then I go to another electronic store, where I buy the largest item. I have my item, they’re charging me $100, and I completely cancel my card and I cancel my credit cards. Now they cannot even go to collections. In some of the states, they cannot even actually pursue legal action because you don’t know who these guys are behind the credit card. And most importantly, because you’re not running a credit check, they can keep continuing this fraud abuse at other merchants who are offering Buy Now Pay Later from other providers. The fraud can accelerate at a bigger level because in one way, we don’t communicate in a closed network. Everybody operates independently.
For example, Best Buy doesn’t share data with Costco. Costco doesn’t share data with somebody else. Somebody who knows this ecosystem can very well play on the Buy Now Pay Later and create a huge amount of fraud. Currently, the way Buy Now Pay Later works is the merchant shares the revenue, a small percentage, to the Buy Now Pay Later company. Over a period of time, once they see that the risk is slowly increasing, regular customers are trying to defraud because there is no credit check or anything going on and the fraud level goes high. The Buy Now Pay Later companies are going to slowly shift the liability to the merchant and say, “now we want you to be a part of this liability as well, because we cannot be taking all the risk. You have to be part of it.”
That’s where disputes come in. Consumers are going to get the product, they are being billed everything, and they’re going to say “I shouldn’t have been billed for the last two months. This is fraud. They defrauded me.” In that case, merchants need to have valid evidence that needs to be communicated to the Buy Now Pay Later companies because Buy Now Pay Later companies are the merchant of records.
That’s where we wanted to provide the solution for Buy Now Pay Later companies where we can connect the merchant and the Buy Now Pay Later service provider and we can represent the chargebacks, the illegitimate ones, and help the Buy Now Pay Later companies recover from their losses. That’s where the losses are going to accelerate if they don’t do anything about it because now it’s the Honeymoon period. Everybody’s happy and excited. After the Honeymoon period is where they have to be very careful about the fraud that’s going to unveil.
Can you explain how the network effect helps to reduce fraud for BNPL?
What we’re planning on doing is when a transaction comes in, there are tools available that check for fraud if it’s a stolen credit card. But oftentimes it’s not 100% foolproof; they still skip through. The unfortunate part is you also have regular cardholders with a valid ID, digital footprints like billing address, shipping address, and machine ID, who bypass the fraud filter who are committing fraud. We are building a database right now, especially for transactions in the Buy Now, Pay Later industry.
For example, if Best Buy is using our database, they will know if this cardholder has committed fraud or disputes in the Buy Now Pay Later section of another merchant in a similar industry. That kind of data mapping is going to be so valuable because we look at the dispute data across multiple merchants, we know what these guys purchased, we know where they came from, and we have a tagging mechanism where we tag all the Buy Now Pay Later disputes that are happening. We will be in a position to tell other merchants… we have seen fraud happening and maybe [they] want to take that into consideration, and then they can take the call.
Now there’s also another element. Just because someone is committing fraud or a dispute on merchant X doesn’t mean they’re also going to give it to merchant Y. There is a fair amount of data that goes into play so that it can give that realistic perspective to the merchant so that they are not cancelling every single person.
How long will it take the industry to reduce the number of disputes for BNPL?
The evolution is the only thing that excited the payments industry. Nobody is like “oh, I’ve done my maximum, there is no other scope for improvement.” We are always improving. What we are trying to do in the payments industry is… create a seamless, pleasant experience to the cardholder at the same time trying to have a fine balance on the fraud and disputes that are about to happen after the transaction. That’s always the dance. We try to play to find the sweet spot. Then every time we introduce something new like Buy Now Pay Later, there is always what I call the fraud gap. We tend to not know how the consumer might react.
Right now, we know how the cardholders are reacting when they are a loyal follower of a particular brand, like HSN and QVC. What we don’t know is how the customer will react when you offer it to the mass public, who are not loyal followers of any brand. That’s the behavior we are trying to learn, and it’s going to take about a year or so to understand how the patterns are evolving. Is there a particular economy that’s more prone to disputes? Or is there a particular geographic search more prone to disputes?
Those kinds of analytics are going to come into play in our company, and when we specialize in dispute intelligence, we analyze all kinds of data on disputes trying to understand what is triggering the dispute to happen. We call that the root cause analyzer. That’s what we use to analyze the patterns of disputes and, as you know, we cannot conclude with a small chunk of data. It takes years of data to understand the patterns. But what we are doing right now is the technology is so evolved, you don’t have to wait years and years to adapt to the situation and when you see the patterns, you can make smaller adjustments that make the fraud lesser and more secure.
The industry is moving towards learning from the behavioral pattern of non-member groups. That’s where we are very curious to know how this will all fall through, how we can represent the merchants, what kind of disputes are going to be coming in. Oftentimes, I’ve seen when issuers are looking at their disputes, the team who was looking at the disputes are less aware of the new trends in payments and technology.
When you explain to them that the product was from Best Buy, but for example, the payment was processed by Klarna and Klarna is receiving the dispute, an issuer can look at it and [not understand why they see Best Buy instead of Klarna.’ There is a confusion, and they might favor the cardholder, not necessarily knowing the connection between Best Buy and Klarna. This is a new industry on the issuer side, especially the issuer dispute department. There has to be a fair amount of education that has to go through for them to understand this new trend and service.
That’s where we are going to be coming in. When we are putting together the dispute packages, we are going to do a fairly good job at letting the issuer know what this transaction is about and why there are two independent companies and the evidence that we are putting it together. We are going to be optimizing that to understand how different issuers are reacting, and that’s where our success is going to be coming through and working closely with the merchant and the Buy Now Pay Later companies.
How does data transparency help solve BNPL disputes?
Best Buy is partnering with company X that is offering Buy Now Pay Later. The merchant of record is going to be Buy Now Pay Later company X, not Best Buy. But imagine when you’re looking at a credit card statement. You see company C and say wait a minute. It’s also going to say $100, not a $500 or $1,000 TV. Even though you know you opted for the installment payment, you are not going to remember who they partnered with and there is going to be a fair amount of buyer confusion that’s going to come into play where they will call their bank and say they never did that [and] don’t know what the $100 is for. And [the bank] might not be able to transfer the data immediately.
What we have done is partnered with card networks like Visa, Mastercard, and Amex, where we are able to transfer the copy of the invoice or real-time to the issuer. If you are a customer calling the bank saying [you] don’t understand what this transaction is, now the bank can say “you purchased this product with Best Buy and went for a five-payment option, and this is part of that payment.” That can give them the clarity to eliminate the confusion.
What we are also going to do is when analyzing disputes, we are going to tell the merchant how many of their disputes are coming from Buy Now Pay Later, what percentage of their transactions are risky through that, and how many of those transaction disputes are happening due to buyer confusion. Now Best Buy or any other company can do a better job in emailing the clients and say this is the option you opted for, and this is what your statement is going to say. They can look at adjusting their email so that it’s more prominent for the cardholder to know what they’re going to see in the credit card statement. And [merchants[ can change a lot of their business policies as to who you want to offer or what product you want to offer.
We also track the disputes that are happening in the Buy Now Pay Later option for a particular product by product segment. You have electronics, you have treadmills, you have T-shirts. If you offer multiple categories of products, and I see a high number of disputes happening on the clothing side, then you might want to change your business decision and not offer them. Or if I see that there are more and more customers filing a dispute from a particular city, you can trigger it and say maybe [in] that city we don’t want to offer it because it is not yielding a better profit.
You can learn a lot. Our tagline is “every chargeback tells a story.” You can learn a lot through the data, and we provide more than 40 different analytical reports for them to know the patterns and make business decisions that can help them secure their profit and have a pleasant customer experience. We also provide white glove service where we can handle them, where we tell them where to look out. Because oftentimes when you provide so much data, it can be overwhelming because this is not their bread and butter. They want to run their business; they want to hire experts like us to do the job.
We also have business intelligence experts who do the work for merchants to tell them where to look and what they need to do, and here is where the results are going to reflect and here are our projected results. They don’t have to do the heavy lifting. We will do it for them, and I think it’s going to be a collaborative effort that we are all going to be doing to make this Buy Now, Pay Later subscription model very successful.