What is Buy Now Pay Later: A-to-Z Guide for Beginners!

In this article, I am going to tell you What is Buy Now Pay Later? so if you want to know about it, then keep reading this article. Because I am going to give you complete information about it, so let’s start.

The buy now pay later payments model brings new challenges and opportunities to marketers and merchants alike.

Considering the rise of the sector and how eager customers have been to set up accounts, it’s worth getting familiar with some of the weak points of the service, such as fraud, legislation, and consumer trust. That way, merchants can better market the credit system to customers, demonstrating transparency and also the possibilities that it offers.

Today’s article focuses on the same,i.e, “What is Buy Now Pay Later”. The articles entail each bit of information necessary for you to know.

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Table of Contents

What is Buy Now Pay Later?

The buy now pay later (BNPL) landscape in India is set to be one of the biggest in the world. A Zest money report found that BNPL was set to capture 9% of the entire eCommerce market in India by 2024, meaning that almost one in ten online customers will soon be using a BNPL service.

According to an article by Fintech Futures, one of the reasons why it might have caught on so much in India is because it’s remarkably similar to the pay-later Khata system and similar installment payments in a credit system.

But those familiar with Khata and other credit systems in India should note how BNPL is a little different from these. Like traditional credit systems, BNPL requires the customer to pay back the money they have borrowed in installments. However, a key difference is that the system doesn’t require a customer’s credit history, making it open to a much broader customer base.

How does buy now pay later works?

With BNPL, a customer doesn’t purchase a good; they use an intermediary: another company that pays for the good themselves. Once the BNPL company pays for this good, however, the customer is responsible for paying back the amount over a certain period of time (which may vary depending on the company offering the BNPL service).

Usually, this is stated upfront, so customers have an idea of the timeframe they’re looking at. Unlike with a personal loan, interest isn’t levied immediately, most of the time. However, if the payment isn’t made during the timeframe given, the lender will start to charge interest.

BNPL is perhaps so popular, particularly in India because it gives customers access to credit. It’s not just about convenience. Rather, customers actually have access to credit now where perhaps they didn’t before. Mobile app developer WeeTech Solution found that adding a BNPL service to your transaction process can increase conversion rates by 30%.

However, the growth of BNPL in India’s market has resulted in some new challenges. Some of these are related to fraud, legislation, and consumer trust. Below, we’ll go into some detail about what these involve.

How fraudsters target BNPL

As the BNPL industry grows and grows, it is increasingly attracting fraudsters looking to exploit its system. This article by SEON on BNPL fraud states that BNPL fraud has only grown – between 2020 and 2021, it grew by 66%. So, you might be wondering: why is this form of payment particularly exploitable compared to regular transactions?

Imagine that a customer has their account taken over. Now, this account might be a BNPL or it might be just an account registered with an online retailer that gives the option of using a BNPL to make a payment. Secondly, fraudsters might try to create a new account using stolen personal information – this might have been gathered during a data breach, and sold on the dark web.

Once a fraudster has taken over a customer’s BNPL account, or credit card or has used stolen personal data from various sources to create a fake account, they can then make illicit purchases using the BNPL tool. This is especially useful to fraudsters as it means that they can secure goods without having to initially spend any money on a user’s card.

The main issue with this is that it means victims won’t know that their card has been used until BNPL charges start coming through – which could be weeks or months later in the future. Unlike regular payments, it takes longer for victims to find out that they have been exploited.

From here, all the chargeback woes will fall on the shoulders of the BNPL business. When the customer realizes their card details have been stolen and used for fraudulent purposes, they are going to initiate a chargeback request. With a BNPL payment scheme, these charges will affect the BNPL itself rather than the merchant.

But the merchants can also be lulled into a trap: They are less likely to check on customers who made a successful first few purchases using BNPL, but the same customer (or someone who gained access to their account) can then change from a legitimate card to a stolen card. Because of their history, they are more likely to be trusted – with bad consequences when it comes to chargebacks.

Another issue is that BNPL doesn’t have credit checks from banks or financial institutions. And any BNPL-related incidents don’t show up on credit histories either. So a customer might look good to a traditional lender even though they have 20 BNPL plans going, and are in debt. Instead, what happens is the service has internal algorithms which are used to assess whether a customer is worthy of using it. However, if the BNPL’s checks aren’t effective enough, this leaves them open to fraud.

On the whole, type of fraud primarily affects the customer who has had their account taken over, as they now owe the BNPL company money. This is a huge issue not only for customers but merchants and BNPL services themselves.

BNPL services also lose their loan’s value as well as they pay for a customer’s goods entirely upfront – although they will still continue to charge the customer whose account has been hijacked interest for not paying back the set amount for the fraudulently acquired good as well.

How merchants can stop fraudsters from exploiting BNPL

As we’ve established, both merchants and BNPLs are at risk from fraud, depending on the type of scheme. Merchants don’t often screen for fraud during BNPL transactions, but a lot of the above issues could be solved by doing so. For instance by creating a digital footprint of a customer. By enriching a customer’s data like their phone number or email address, they can find out whether they are a known criminal on a blacklist, for instance.

You can also find out if their phone number is disposable – many criminals use a disposable phone number to create a BNPL account. That way, merchants can weed out fraudsters before they even have a chance to make a BNPL transaction. Merchants can also introduce friction to high-risk customers during the BNPL transaction process, adding extra layers of verification like identity confirmation or a call with the merchant support team to confirm that they are legitimate customers.

Another option is having more identity verification during the onboarding process itself. This could involve requiring customers to provide a form of identity documentation upon signing up – in fact, many companies require this to create a BNPL.

However, Know Your Customer (KYC) checks that require identity documents to onboard customers won’t catch all criminals – many are finding new ways of getting around this process using Photoshop and deep-fakes to get around biometric verification controls. However, KYC checks are expensive.

Those who have to conduct many of these often find a good solution in pre-KYC checks. Having data enrichment to catch criminals while they’re creating a BNPL account is a really good way to stop them from abusing this system, even before they reach the KYC stage.

Legislation

There’s currently a lot of ambiguity around BNPL regulations in India – and indeed the world. However, The Reserve Bank of India announced in the first quarter of the financial year that it was providing some clarity over regulations regarding credit cards, which also extend to some BNPLs as well.

According to an article by Mondaq, it is not considered a traditional form of credit and so doesn’t face the same regulations that credit does. This means that governments and banks are faced with a new challenge of defining what BNPL actually is. As the debate currently stands, legislation needs to be much clearer on whether BNPL is a form of credit or something else which needs to be regulated in a different way.

Another issue for BNPL is whether they boost “predatory lending” and need additional customer regulations to make sure that customers are not exploited. Unfortunately, this issue is made worse in India – as the above article states – due there isn’t a statutory definition of credit. Instead, The Bank of India has defined credit as for instance “loans for customer durables”.

Consumer trust

Due to its unregulated nature and its increased risk of fraud, some companies might have a hard time selling BNPL to more wary customers. This creates a new challenge to marketers looking to help broaden a company’s audience by including a customer base who might benefit from a BNPL system.

The key here, therefore, is to be transparent about both the benefits and risks of BNPL. Companies might do well by investing in screening for fraud during BNPL transactions – as so few companies are doing this at the moment, it might help them to stand out from the crowd.

Despite this, however, the majority of customers do tend to trust BNPL services more than other credit systems. According to eCommerce studies by Fairer Finance, many customers actually trust BNPL services more than traditional credit systems, particularly those between the ages of 18-30. Companies that offer a BNPL service like PayPal, Klarna, and ClearPay came out on top here. So the key here is to not only sell BNPL services to customers but also show how companies are working to make their services much safer for their customer base.

So the overall verdict is while many customers might be wary of BNPL, younger customers in particular are more ready to embrace the service. This is worth taking note of as a marketing company looking to promote a company’s BNPL service – younger customers who are in general most trusting of BNPL become a great new audience to tap into. Trust is a huge part of ensuring brand loyalty – it’s worth explaining how you plan to make BNPL safer for your customers.

Opportunities

This leads us to discuss the new opportunities that come with BNPL, for merchants and marketers alike. For one, merchants can now reach more shoppers by integrating BNPL into their transaction process.

By incorporating BNPL into their marketing strategies, marketers can also help merchants to reach more shoppers and showcase forward-facing attitudes. This leaves marketers with an interesting challenge – how to market BNPL services that companies use to customers.

It’s worth getting to grips with some of the marketing strategies that BNPL companies are currently using. As The Drum talks about in their article on ad agencies working with brands like Klarna and ClearPay, “old school tactics” like experiential activation (in other words, promotional events in real-world situations). You might try tailoring BNPL ad campaigns to different demographics. For instance, older customers who are less trusting of the service might benefit from ads that are transparent about BNPL fraud and how your company tackles it.

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