It is very easy for many who are new to the fintech space to think that financial technology is an exclusive term for payments technology, and while there is some truth to this, it does not tell the entire story about fintech. However, in June, The Fintech Times is looking to indulge this belief as we look to discuss hot topics surrounding both sending and receiving payments, like buy now pay later (BNPL), early paydays and much more.
Having established our BNPL coverage with a discussion around its rising popularity, where its associated affordability and increased sales power were all cited as catalysts to its widespread adoption, today we’ll be turning tables to identify the drawbacks of the paytech.
They stack up
Opening the dialogue, Andy Cease, manager of financial solutions at Entrust, sees the drawbacks of BNPL in its fractured contract-by-payment nature, which he says can make it difficult to track numerous repayments: “There’s no immediate impact on the consumer’s credit score, but having to track multiple BNPL contracts can increase the level of effort required to fulfil their payback obligation. In turn, this can lead to lapsed payments and ultimately a hit to the consumer’s credit score if it takes too long for them to make a payment.”
With consumers increasingly turning to BNPL payment options to offset the rising cost of living, Cease warns that more consumers managing more individual repayment contracts will require a more balanced approach, sharing that “while BNPL can be a great option, consumers need to balance what they want versus what they actually need to pay for using BNPL to avoid having to make too many sets of payments at the same time.
But the providers have a job to do too, as Cease goes on to describe, “Institutions have some responsibility with BNPL as well. They need to make sure they are keeping the highest level of security and do not take a step backwards in data protection in order to offer BNPL.”
Sameer Pethe, a partner at Kearney, underlines Cease’s comments with: “The risk is that customers, perhaps not understanding exactly what BNPL entails, end up buying more than they can afford and as a result get into financial difficulties.
“Thankfully, recent announcements from the Financial Conduct Authority (FCA) and the news that some of the larger BNPL operators are now working with UK credit reference agencies shows that the sector is well aware of these issues and is working to address them.”
On the topic of data protection, Ruston Miles, founder and advisor at Bluefin, sees one of the major drawbacks of BNPL in the vulnerability of the vast amount of sensitive payment data it cultivates.
“Any service that requires long-term storage of payment data increases the attack surface and raises your cybersecurity risk – and BNPL is no exception,” he shares. “With attacks targeting payment data rising, BNPL lenders need to make every effort to ensure consumers’ payments and personal data are secure.”
However, despite concerns around BNPL data protection, Miles recommends that fighting fire with fintech could offer a practical, safer solution.
His recommendation states that “the best way to [protect data] is by devaluing it through a combination of encryption and tokenisation. This process replaces sensitive data with a token, or random string of characters. In the event of a breach, this data is now useless to hackers since all they will be able to access is the random token.”
Aaron Begner, GM of EMEA at Forter, added: “The near-instant decision-making associated with these transactions, unfortunately, makes BNPL schemes attractive for fraudsters. There is less risk for bad actors to abuse these systems, due to it being easier for them to directly access goods or services. This inevitably leads to an increase in chargebacks and lost retailer revenue.
“To prevent rampant fraud, the security gaps in BNPL platforms must be understood. Soft credit checks are a popular solution, but they commonly fail to pick up anomalies such as misspelt names, phone numbers, or compromised user accounts that have been sourced through phishing attacks.
Galia Beer-Gabel, a partner at Team8, identifies the complexity of completing a transaction as one of the major downfalls of using the service within e-commerce environments, stating that “Some consumers have complained to relevant agencies about hidden fees when returning items paid for with BNPL services or late payment penalties, with reports showing that 42 per cent of BNPL users have made late payments.
“Critics argue that in the absence of regulatory oversight and the ability of users to easily take on new forms of debt, BNPL encourages impulse spending among consumers who may not fully understand that they’re essentially taking out a loan to complete the transaction.”
Beer-Gabel adds that these issues, along with many raised by the participants of this discussion, have “forced regulators to pay attention and look at ways to ensure consumers and merchants can safely benefit from BNPL solutions.”