Top Risks Facing Buy Now, Pay Later FinTechs
This is part 1 of a 3-part series
Accelerating Growth in the FinTech Space
While the COVID-19 pandemic is upending the status quo for many consumers, merchants and lenders alike, one segment of FinTechs continues to enjoy accelerating growth amidst market uncertainty.
As you may have heard by now, consumers and merchants are rapidly adopting buy now, pay later financing options offered by a new class of FinTechs that have strategically positioned themselves at the point of a consumer’s buying decision.
As buy now, pay later FinTechs continue to establish and expand their respective footprints in the U.S. market, many are refining existing strategies to better mitigate merchant and consumer risks.
Merchants seek partnerships with Buy Now, Pay Later FinTechs
As states continue to battle the pandemic, some brick and mortar-based merchants are migrating their businesses online using eCommerce platforms, such as Shopify, Magento or WooCommerce. With lock-down measures still in effect in some states, merchants are observing higher sales originating from digital channels versus offline channels, as consumers adjust their shopping habits to conform to the “new normal.”
Having learned tough lessons from the Great Recession, many consumers are adopting low interest or interest-free financing options as a substitute for traditional financing options like credit cards.
To adapt to the evolving landscape, many merchants seek partnerships with buy now, pay later FinTechs to meet customer expectations, sustain sales revenues and to grow average order values. By offering to bear all credit risk and fraud risk on behalf of merchants, buy now, pay later FinTechs enable merchants to focus on their core business and on improving the shopping experience for their customers.
With accelerating growth comes unique risks
Merchant Default Risk
Some merchants are now at a greater risk of failure. They’re coping with declining revenues, rising variable costs and high fixed costs, due to locally mandated lock-downs and changing consumer spending habits. In light of these circumstances, many merchants are relying on access to emergency working capital via The Paycheck Protection Program (PPP) established by the CARES Act. While many merchants have received PPP loans, other smaller merchants are still working to secure working capital. All told, these factors contribute to increasing merchant default risk for merchant partners like buy now, pay later FinTechs. The key implication here is that struggling merchants that are working with buy now, pay later FinTechs can shutter their business without notice, which is problematic if the merchant owes funds to its partners.
Merchant Fraud Risk
Unscrupulous merchants can be a channel of fraud. The risk for a buy now, pay later FinTech starts with not properly identifying legitimate from illegitimate merchants. Left undetected, illegitimate merchants could easily submit falsified orders using real or fictitious consumer personally identifiable information (Pii) and collect payment for the products “sold,” but not shipped. The buy now, pay later FinTech is left holding the bag with nobody to go to for repayment.
Buy Now, Pay Later FinTechs leverage 3rd party solutions to mitigate risks
Buy now, pay later FinTechs are helping to mitigate merchant default risk and merchant fraud risk. They are doing this by combining data, such as principal ownership identity and risk detail, business cash flow analyses, previous payment performance, bankruptcies, liens or judgements with other data sources. As a result, they can refine their view of the merchant partner’s risk profile.
Additionally, buy now, pay later FinTechs are seeking assistance from 3rd-parties with expertise in data analytics, risk score/index modeling and decision automation. These components are extremely powerful in a risk management strategy. They include enabling quick approve/decline decisioning during merchant onboarding, as well as timely responses to changing risk conditions uncovered during ongoing merchant monitoring. Lastly, recognizing that some retail eCommerce businesses are managed by small, first-time entrepreneurs, some FinTechs are now contributing merchant data to Equifax in an effort to help first-time entrepreneurs build up and thicken their commercial credit file.
Thanks for reading this far. My next blog post will highlight the unique set of challenges that buy now, pay later FinTechs face when seeking to balance a streamlined user experience with consumer default and fraud risk mitigation. We will end the series with a webinar. Our subject matter experts will share industry best practices for deploying their overall risk mitigation strategy.
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