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Bini Mary Easow, Senior Architect
(Revenue Management),
SunTec Business Solutions
In 2012, a small and innovative venture named Affirm was launched as part of the initial portfolio of a startup incubator. By 2014, Affirm had raised more than USD 50 million in venture funding and had onboarded numerous merchant partners and given rise to a new phenomenon –
1With increased digitization, the emergence of younger customer segments with weaker credit histories, and even global events like the ongoing pandemic have led to the BNPL segment becoming a game changer in the global credit industry. It generated nearly USD 100 billion in 2020 and is estimated to reach USD 3.98 trillion by 2030. 2 But the industry is not without some risks that financial organizations must be cognizant of and know how to mitigate.
To begin with, there is credit risk, that can be further subdivided into customer risk and merchant risk. The customer may not be able to make the payment due to lack of funds, or even forget to pay. Some may have no credit history making it difficult to assess credit risk. There are also several kinds of frauds being reported within this space, including synthetic identity fraud – use of fake identities to get through KYC and soft credit checks. The BNPL provider takes full ownership of both customer and merchant risk, and so stands to lose a considerable amount of money.
A multi-pronged approach to risk management and fraud protection is critical in customer credit risk management. When a customer attempts to use the BNPL option, providers must make two key decisions. First, if they are a valid user and second, how much credit limit to allocate. AI and Machine Learning can help providers assess customers’ authenticity. Some of the ways these technologies work include device tracking, IP profiling, email tracking, phone number monitoring, detecting unusual purchase behavior, tracking shipping address inconsistencies. Maintaining consistent communication with their customers can help the merchants in curbing BNPL fraud.
A multi-pronged approach to risk management and fraud protection is critical in customer credit risk management. When a customer attempts to use the BNPL option, providers must make two key decisions. First, if they are a valid user and second, how much credit limit to allocate. AI and Machine Learning can help providers assess customers’ authenticity. Some of the ways these technologies work include device tracking, IP profiling, email tracking, phone number monitoring, detecting unusual purchase behavior, tracking shipping address inconsistencies. Maintaining consistent communication with their customers can help the merchants in curbing BNPL fraud.
Technology is crucial for managing merchant risk as well. Providers can leverage an automated platform to manage incentives for merchants who bring in more disciplined customers. This could include discounted merchant fees or additional services offered free of cost. Provisions for mitigating merchant fraud can be included as part of merchant acquisition agreements. Providers can leverage technology to analyze merchant data to determine risk.
Merchant data such as principal ownership, analysis of business cash flow, previous payment track record, bankruptcies etc. can be analyzed using in-house or third-party data analytic systems. This can help in faster decision making at the time of merchant on-boarding. Merchants also need to be continuously monitored to keep track of changing conditions and appropriate actions need to be taken. And like with customers, merchant risk information must be shared across the BNPL ecosystem via a common platform to identify and blacklist fraud merchants. Some BNPL providers are now contributing merchant data to Equifax to thicken their commercial credit file.
Many countries have already started to work on regulations for the emerging BNPL space. Some have even implemented new laws to protect customers. But providers and merchants must also work together to educate customers on the risks pertaining to BNPL. Many customers don’t think of it as credit and don’t scrutinize it as much as they would when using other transaction options. This may lead to overuse and bad debts. Statutory warning messages must be made mandatory for BNPL options as well.
The BNPL offering is here to stay. Recognizing and addressing the risks associated with this space will help improve the way it functions, bring in more merchants and customers and ensure increased revenues for providers and merchants alike. Building a healthy BNPL landscape is of equal advantage to all players. Better risk management will lead to increased revenue, which will allow the providers to offer better pricing to merchants and customers which will drive greater adoption of BNPL models.
