The Buy Now Pay Later (BNPL) sector has grown rapidly in the last few years by giving consumers the option to spread the cost of online purchases over several months. However, more recently the sector has faced criticism from consumer interest groups and the Financial Conduct Authority (FCA).
Not only are there concerns that consumers could quickly build up large debts through spending more than they can afford to. There are also worries that fraudsters could target companies in the Buy Now Pay Later sector, as well as the consumers that use their services.
By using fake or stolen identities, fraudsters could potentially open accounts and make purchases with no intention of ever paying for what they’re buying. Equally, without sufficient safeguards in place, fraudsters could also takeover existing consumer accounts and start buying whatever they desire. Not only could this plunge BNPL users into debt through no fault of their own, but it could also impact their credit scores, making it more difficult to secure a mortgage or loan in the future.
With concerns growing, the FCA reviewed the unsecured credit market earlier this year and is now calling for greater regulation of Buy Now Pay Later services to protect consumers. While unregulated providers must now be authorised and regulated by the FCA to keep trading.
For start-ups like Clearpay, Klarna and Laybuy, which are operating in the Buy Now Pay Later sector, protecting both consumers and their bottom line from identity fraud is now a top priority. But that’s not the only thing that BNPL providers are keen to protect. Reputation is just as important. In a relatively new sector, winning the trust of both consumers and retail partners is critical.
To minimise the risk of identity fraud, many companies in the Buy Now Pay Later must review their operations and make changes to comply with the strict requirements of Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. This will mean making greater use of identity verification services to verify and authenticate new users during the customer onboarding process, while also carrying out sophisticated checks each time users choose to use their services.
As well as increasing security, identity verification services can also help BNPL companies to identify customers that may be spending more than they should or are more likely to face problems making payments. As well as protecting customers, affordability checks can also protect BNPL companies from the risk of customers defaulting on loans and the impact of this on their bottom line.
What BNPL Companies Need to Know About Identity Verification
Buy Now Pay Later providers can ensure that their customers are really who they say they are by using Identity Verification services to check and validate personal information about each user.
BNPL companies may need to verify a users’ identity during the customer onboarding process, as well as when a user is looking to making a high-value purchase or change their delivery address. In many of these moments, BNPL users may be required to provide proof of identity. This could be by typing in a unique code sent to an e-mail address or uploading a photo of an ID document, so that it can be authenticated against third-party data, such as credit reports or voter information.
Affordability checks can also be carried out in real-time to ensure that shoppers don’t spend beyond their means. Typically, these checks use third-party data, such as credit scores or the property values where a shopper lives, to judge whether a purchase is affordable. This gives BNPL companies more data to make decisions about who they offer shopping loans to, while also protecting consumers.
Identity Verification for BNPL Services: Why is it Important?
Identity fraud makes up around 61% of all fraud cases reported to the UK’s National Fraud Database, with the total number of identity fraud cases rising by 32% over the past five years. Online retailers and banks are a frequent target, while BNPL companies are increasingly being targeted by fraudsters using false or stolen identities. Common threats include carrying out phishing attacks to obtain users log-in details, creating new accounts with stolen payment cards, and taking over existing accounts.
In turn, this is destroying trust in BNPL companies and stunting the growth of the sector overall, as a growing number of consumers feel wary when using their services to spread the cost of purchases. This is exacerbated by existing concerns about identity fraud. According to the latest GBG State of Digital Identity report, one in three consumers think their personal information is accessible online. While two in five (44%) feel unsafe making purchases from online companies based outside the UK.
Identity verification can help BNPL companies to earn consumer trust, by demonstrating compliance with FCA regulations and minimising the risk of identity fraud so that it become much less prevalent. Greater use of affordability checks could also help BNPL companies to address concerns that they are not taking sufficient action to prevent consumers from spending more than they can afford to.