Research published by Statista Research Department in April 2023 states that over a third of BNPL customers in the US were anticipated to utilize these services in February 2022 to avoid accruing credit card debt. Platforms that offer “buy now, pay later” financing offer consumers short-term loans for in-person or online transactions. The majority of respondents said that because of the growing costs, they would be more likely to employ this sort of service.
What is Buy Now, Pay Later (BNPL)?
According to Investopedia, buy now, pay later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them over time, usually with no interest.
Buy Now, Pay Later (BNPL) varies from vendor to vendor, but they usually offer short-term loans with fixed payments and no extra fees. When you shop at a store that offers BNPL, you can choose the BNPL option at the checkout. You’ll need to pay a small amount upfront if they approve your application. Then, you’ll pay off the rest of the money over a few weeks or months in equal payments, and you won’t have to pay any extra fees during this time. In many cases, you pay extra charges in the form of interest.
Advantages and Disadvantages of Buy Now, Pay Later
Buy Now, Pay Later (BNPL) services have gained popularity due to their convenience and flexibility. These services allow consumers to make purchases and delay payment until a later date, often with interest-free options. While BNPL offers various advantages, it’s important to use them responsibly and understand the terms and conditions associated with each transaction.
BNPL has gained significant popularity within dental practices, veterinary clinics, medical spas, vision practices, and other non-insured healthcare providers for several compelling reasons. These healthcare and wellness services often involve substantial costs, and BNPL offers patients and clients the flexibility to manage these expenses by spreading payments over time. In cases where insurance coverage is limited or absent, BNPL becomes an attractive credit option, ensuring that individuals can access treatments and procedures without financial constraints. Furthermore, the convenience, minimal approval barriers, and promotional financing options associated with BNPL make it a preferred choice among patients and clients, ultimately streamlining the payment process for these businesses and enhancing overall customer satisfaction.
The Risk Landscape for BNPL Credit Providers
The Buy Now, Pay Later (BNPL) sector presents multiple avenues of risk for credit providers, which could significantly impact their financial stability and long-term viability.
Default Risk:
The most immediate concern is the risk of borrowers defaulting on their payments. When a large segment of borrowers fails to fulfill their obligations, it creates a domino effect of financial stress, potentially affecting the company’s liquidity and profitability.
Fraud and Identity Theft:
The digital nature of BNPL services makes them susceptible to fraudulent activities and identity theft. Scammers using false identities can secure credit and dodge repayments, thereby inducing financial losses for the provider.
Operational Costs:
BNPL services come with a set of operational expenditures such as customer support, credit assessment, and payment processing. Mismanagement of these operational costs can quickly erode the overall profitability of the BNPL program, affecting the bottom line.
Interest Rate Risk:
Some providers offer low or even zero-interest options, effectively transforming the BNPL service into short-term loans with minimal interest income. This low-profit environment poses a risk management challenge, especially if interest rates in the broader economy shift unfavorably.
Credit Risk:
BNPL services often attract a broad range of consumers, including those with less-than-perfect credit histories. This wide net diversifies the credit risk but also elevates the potential for mass defaults.
Regulatory Compliance:
The evolving regulatory landscape adds another layer of complexity. Non-compliance with current and future regulations can lead to heavy fines, legal action, and reputational damage, all of which can be costly to navigate.
Market Competition: With a growing number of companies entering the BNPL space, competition has become fierce. Intense rivalry can trigger price wars, promotional offers, and aggressive marketing, squeezing profit margins further.
Economic Downturns: Economic downturns usually result in increased default rates as consumers face financial hardships. This cyclical risk requires providers to maintain strong risk management strategies to weather economic fluctuations.
To mitigate these risks, BNPL providers typically employ risk assessment and underwriting practices to evaluate the creditworthiness of borrowers, set appropriate credit limits, and establish collections procedures to recover unpaid balances. Additionally, they may diversify their lending portfolios and adjust their terms and conditions to manage risk effectively.
Navigating Challenges in BNPL Lending with Visualogyx
As BNPL services skyrocket in popularity, a pressing issue arises for financial lenders: verifying the legitimacy of businesses applying to offer BNPL programs to their own clients.
Picture this scenario: A lender gets an application from a veterinary practice aiming to extend BNPL financing to its customers. On the surface, the practice has a strong credit profile and seems genuinely interested. However, upon closer inspection, the submitted location information is bogus. When the lender requests photo verification, it turns out the images are internet stock photos, casting serious doubts on the practice’s authenticity.
This issue of business legitimacy isn’t isolated; it’s a systemic challenge in the BNPL lending sector. Lenders must be able to trust not just individual borrowers but also the businesses through which these financing options are offered. That’s where Visualogyx steps in. It integrates a metadata authentication step into the business application vetting process. This added layer of due diligence empowers BNPL underwriting teams to more confidently assess and manage the risks tied to the businesses they partner with.
Visualogyx’s KYPiT Authentication Solution
Visualogyx specializes in inspection management and verification technologies, and has developed a robust software solution called KYPiT designed to elevate underwriting protocols for BNPL services.
Here’s how it works:
When a business, such as a veterinary clinic, decides to collaborate with a BNPL firm to offer financing options to its clients, the BNPL company deploys an inspection assignment via the Visualogyx platform.
The applicant business then uses the Visualogyx app to conduct an exhaustive inspection. They gather extensive data and documentation, which can include a diverse array of visual and video content encapsulating various aspects of their operations, like external signage, customer waiting areas, and specialized treatment spaces.
After completing the inspection, the BNPL firm accesses the Visualogyx platform to review the submitted materials. They utilize KYPiT, or “Know Your Product, Process, Partner, or Provenance,” a state-of-the-art feature for metadata analysis and user interaction verification.
KYPiT rigorously analyses the genuineness of the submitted photos by scrutinizing various elements like geolocation data, timestamps, and signs of digital alteration. It also evaluates the digital footprints of the data and individuals involved in the inspection. A comprehensive risk report is generated, flagging any suspicious activity or inconsistencies. This depth of examination creates an added layer of fraud deterrence, amplifying the BNPL firm’s risk mitigation capabilities.
By authenticating third-party inspectors and conducting in-depth integrity checks of digital footprints, KYPiT introduces multiple layers of security into the lending ecosystem. When coupled with Visualogyx’s Collateral Lender Asset Verification, the platform offers a comprehensive solution that’s particularly well-suited for other financial services, effectively bolstering their defenses against emerging risks and fraudulent activities.
End Note
As the financial landscape continuously adapts, staying one step ahead of emerging risks is essential for lenders aiming to excel in the competitive BNPL sector. Safeguarding the business of financial lending goes beyond mere due diligence. It’s about making a steadfast commitment to the security and integrity of your operations, mitigating fraud risks, and fostering trust with borrowers. In this ever-changing landscape, Visualogyx equips lenders with a tool to resiliently help navigate the challenges of the BNPL market.
