Buy now, pay later (BNPL) has become increasingly popular in recent years. While the concept of making installment payments on retail purchases is not new, BNPL offers a new iteration on this classic theme. It allows consumers to access funding quickly and easily, and they get to pick and choose which transactions need financing.
Merchants love BNPL because it allows them to increase their revenue by offering fast and easy loans to their clients. Lenders enjoy the revenue created by the loans. Fintech firms have primarily dominated this space since its beginning, but there are compelling reasons for financial institutions to get involved.
When consumers see a BNPL option at check out, they also see the name of a fintech company or lender. Many consumers would prefer to work with their main bank, but that’s often not possible. If you want to offer this program to your existing clients or new clients, here are some essential tips to keep in mind.
1. Leverage your strengths
Your financial institution has very rich data about your customers. You can leverage that data to process BNPL applications quickly, but you can also use that data to streamline payment collection. When consumers set up BNPL with an entity they haven’t done business with before, they have to jump through extra hoops.
They may need to provide additional application details, sign up for auto repayments, or send payments to a new entity. If your clients know that they won’t face these obstacles by choosing you as their BNPL partner, they will become more likely to choose you.
2. Work with local retailers.
To get started, you may want to become involved with BNPL programs for local retailers. If they don’t currently offer BNPL, you may be perfectly poised to help them get that off the ground. They get the benefit of increased sales, while you enjoy the profits from the installment loans.
3. Consider underwriting large purchases.
As the BNPL landscape grows, consumers may want the ability to use BNPL for larger purchases. Traditionally, BNPL lenders haven’t stayed out of this arena. But banks are better poised to underwrite installment loans for large purchases ranging from sailboats to plastic surgery. Moving into this subsection of BNPL loans can put you at an advantage.
4. Collaborate with experienced partners.
You don’t have to reinvent the wheel. Find partners who understand the technology behind BNPL. You don’t have to create your own in-house lending products. Instead, you need experienced people who can help you create the loans and the technology to review and fund them.
5. Make sure you understand the regulations.
The BNPL sector has largely been unregulated, but as it gains popularity, it will become more regulated. Right now, there are class-action lawsuits from consumers who allege that the BNPL lenders did not provide adequate information about payment plans or fees.
To protect your financial institution, you need to ensure that you understand the regulations related to all of your business endeavors. This can be especially critical when you’re working with relatively new products such as BNPL loans.
Ideally, you should be as transparent as possible when making BNPL loans to clients. Transparency can help with compliance, but it can also be critical for your reputation.
6. Invest in fraud protection
As BNPL becomes more popular, so too does BNPL fraud. A lot of the people who use BNPL schemes have slim credit files. They may not have a lot of loans or credit cards. BNPL consumers are often people who are still establishing their credit.
This makes it easier for fraudsters to fabricate their identity. BNPL fraud actors may use a synthetic identity to buy something and pay later. Or they may use real stolen details and phish for the remaining details that they need.
Different types of fraud tend to happen at different points in the process. Someone who’s using a fake or stolen identity commits fraud at enrollment. Other scam artists may take over the account after enrollment when they go in and change an address or a funding source.
To detect and prevent BNPL fraud, you need anti-fraud tools that monitor the entire transaction and not just the financial aspects. Your fraud prevention and detection tools should work in real-time. They should understand the anatomy of a legitimate transaction and the usual signs of fraud. Then, if these tools flag a false positive, they should rely on machine learning to improve their efforts the next time. This allows your fraud approach to refine and improve its abilities over time.
At SQN Banking Systems, we provide our clients with fraud detection and prevention tools that help them detect fraud across all payment channels and products. We work closely with financial institutions to reduce their risk of fraud regardless of the types of products they offer their clients.
Want to protect your financial institution from fraud? Then, contact us today. We’ll start with an assessment of your current anti-fraud practices and help you identify the best steps forward.