As fraud soars, what's next for Buy Now Pay Later?

As Buy Now Pay Later (BNPL) market is on ascending path, Adam Desmond, Mitek stresses the importance of having the necessary fraud prevention measures in place to safeguard consumers

In recent months, the Buy Now Pay Later (BNPL) market has faced enormous public scrutiny. In such a customer-centric industry, it’s been surprising to see providers coming under fire for failing to protect their customers from fraud. While having as few barriers as possible in the onboarding process might help BNPL players gain new customers fast, it does not fare well long-term. Just as customers will find it easier to sign up, so will fraudsters.

In the BNPL market, trust is critical – providers must trust that customers will be able to pay later, and consumers must trust that the provider is acting in their best interests. As BNPL providers see cases of both opportunistic and advanced fraud rise, they could face damage to their reputations and relationships with retailers, and put consumers’ trust on the line.

To uphold safety and security in the onboarding process, it is crucial for BNPL providers to understand the fine balance between onboarding as many customers as possible, as quickly and easily as possible, and making this process safe and secure. This is where tighter regulatory requirements come in.

Protecting customers first and foremost

It hasn’t taken long for some BNPL providers to gain the level of brand exposure and retail partnerships they need to grow. Some, like Klarna and ClearPay, have become a mainstay in the fintech space, with as much name recognition as Monzo or PayPal. To have longevity in the market, however, BNPL platforms will need to double down on the checks they perform when onboarding their customers. Either they do this voluntarily – getting ahead of the threat – or financial regulators will jump in to protect customers. 

While customers have come to expect that financial firms will protect them from fraud, in reality, factors such as cost and customer experience sometimes come first. This can mean that fraud prevention takes a backseat. What’s worrying is that if we don’t regulate the BNPL market soon, some providers will continue doing only what is absolutely necessary to onboard its customers, which will leave too much room for fraudsters to get in.

The impact of regulation

For financial regulators to prevent money laundering in the industry, businesses must put measures in place to meet specific requirements such as Know Your Customer (KYC), Anti-Money Laundering (AML) and Purchase & Sale Agreement (P&S) regulations. This has the knock-on effect of mitigating the risk of many other types of financial fraud. Adopting similar measures to the wider industry would help tighten the BNPL market. One example is making advanced KYC checks mandatory – this would force providers to confirm that their customers are really who they say they are, minimising the risk of fraud from the very start of a customer journey.

That said, enforcing these checks alone is not enough to stop fraud. How financial institutions deploy these checks can have an impact too. For example, using only data to verify who customers are can let fraud easily slip through the net. An additional layer of security – like checking the verifying customer data against their ID documents and biometric data, like a selfie – enables financial institutions to not only know who the customer is, but also prove they are the person behind the device in real-time. Many regulated firms in the wider industry use identity verification technologies like these, to benefit from both high levels of assurance and the seamless customer onboarding that will help their bottom line. These technologies also make it harder for fraudsters to get through, greatly reducing opportunistic fraud.

Old world vs. new world

It’s clear that BNPL providers are not subject to as stringent regulatory checks as other, more ‘old school’ credit providers. Because of this, those credit providers who have already taken these steps have an opportunity looming: to take on BNPL providers at their own game. If they can get the customer journey right and maintain all-important consumer trust, they can create new products and services to compete with BNPL providers and satisfy the regulators.

This is a turning point. In the future, we could see retail and banking brands offering BNPL products themselves with a white-label approach. Here, the brand you are shopping with or banking with – that customers already trust – is simply extending what they are offering, to cater for more customers. The good news for consumers is that for banking brands in particular to branch out, no additional regulatory checks will be necessary – they are already tightly regulated, and thus adept at countering the risk of fraud.

BNPL providers are at an inflection point. It’s critical that business leaders put the necessary measures in place –¬ namely adopting the technologies they need to tighten up their onboarding processes, without sacrificing on experience. If they fail, they risk losing their reputation, customers, and investors to those who put regulation first. If they succeed, the sky could well be the limit. Where credit is involved, one thing will always be certain: safety and security come first.

About Adam Desmond

Adam Desmond is the UK&I Country Lead at Mitek Systems. With over seven years experience in identity, his last four years has been dedicated to document authentication and ID proofing tech. Adam partners with fintech’s and tier one banks to build out customer led identity solutions across the region, passionate about creating beautiful customer IDV experiences and helping to implement best practice for both digital and 'phydigital' journeys.

About Mitek

Mitek brings the future to business with patented solutions and intuitive technologies that bridge the physical and digital worlds. Our leadership in identity verification, including facial biometrics, image capture technology and ID card verification enables customers to confidently onboard users, verify identities within seconds and strengthen security against cybercrimes. Mitek products power and protect millions of identity evaluations as well as mobile deposits every day, around the world.