Buy Now Pay Later has been gaining trend around the market and it has been a good credit option for consumers.
More and more retailers are jumping on the buy now pay later (BNPL) bandwagon, and this is because of the increasing consumer demand. BNPL is an alternative to credit cards and helps the consumers who carry low or zero credit scores and that is why it has gained so much popularity that people are increasingly accessing the service.
However, this payment method has become a method of concern for its providers and regulators. In the mainstream BNPL model, there is credit risk or depletion of established credit scores however there is a major issue which is BNPL fraud.
Credit cards issued by banks are sensitive to fraud but when they start to soften the lending methods and standards and cardless or card-not-present transactions grow, BNPL experiences higher risk.
BNPL surely makes your purchases affordable without any extra cost, but it is not as free as it suggests, these services are popular with criminals too and they are finding new methods every day so that they can trouble more and more consumers.
Regulatory standards such as know your customer (KYC) help the banks to root out criminals and fraudsters who just pretend to steal consumer money. but there is no certainty that every crook gets caught.
Why does BNPL possess a higher risk?
One of the major reasons BNPL lacking behind in selecting the right consumers is BNPL firm’s reliance on its date for approving new users. Usually, people with zero credit or low credit are the ones who have committed an error.
Moreover, there are no formal checks on credits and these firms utilise their algorithms to regulate creditworthiness and introduce them to the range of BNPL services.
Usually, these companies have to suffer as fraudsters use the credit offered to them and don’t return the amount. And due to lower security checks, the merchants can’t even recover the money back, making it difficult for the firms to initiate new offerings.
Unlike credit card companies, many of these BNPL providers generate revenue from merchants. Companies like Klarna and Afterpay charge small fees from retailers on all transactions processed through their platforms.
Merchants and retailers utilise these platforms as they witness sales increase. Many consumers find this option affordable and this is the reason that people spend more than they need to. Consumers have started to live beyond their means.
BNPL facilities are attractive and with its massive rise in popularity and the fact that you can make split payments easily and it’s so easy for one to overspend or purchase impulsively. This is concerning as most consumers are inclined to think that their purchases don’t hurt their wallets as much as paying for everything at once.
Difference between BNPL and credit card checks
The lack of regulatory measures has made this market very volatile and the Monetary Authority of Singapore has also raised concerns regarding rising consumer debt due to the incompetency and easy lending methods of BNPL facilities. MAS is also considering regulating the BNPL industry.
Of course, BNPL conducts internal assessments but they are not solid as credit card checks. But many BNPL players are trying to improve their verification procedure. For instance, BNPL service provider Split has been using a technology that determines whether or not a transaction can be processed/ approved.
Moreover, its new users are only allowed to have one active instalment plan at one point in time and they can’t open another plan until and unless they pay back the previous amount.
Rely has set the maximum transaction limit at S$4,000 for credit card payments and S$1,000 for debit card payments. The BNPL player has made it clear that limits are usually lower for new shoppers until they get to know them better.
Similarly, Pace’s maximum transaction limit has been set at S$3,000 for credit card payments and it only allows S$1,500 for debit card payments.
These have been a few examples and this industry has a lot to change. On the other hand, credit card lenders offer you a credit limit of up to 4 times your monthly income.
Moreover, there are regulatory limits for people and these limits are set according to their income. Even if credit cards offer four times the credit amount, they run a solid background check and ensure that the potential customer has a good credit score and has made previous payments on time.
So this suffices that credit cards hold more potential and the BNPL providers need to buck up their security so that authentic consumers can reap the benefits.