BNPL Global Trends in 2023

by Jimmy Fong
BNPL took the world by storm – and regulators have started to notice.
Let’s see what that entails in terms of KYC and AML checks, and how your BNPL company can meet compliance without sacrificing user experience.
In BNPL, as well as other finance-related sectors, KYC and AML are closely linked to legislation in place to prevent illegal practices on behalf of BNPL customers – including money laundering and terrorism funding.
KYC stands for Know Your Customer. AML stands for Anti Money Laundering.
Both are practices designed by government regulators. They define processes that certain types of businesses must go through in order to:
What makes KYC and AML unique in the world of Buy Now Pay Later companies, is that the regulations are still being developed.
The BNPL craze took the world by storm following the COVID-19 pandemic. The BNPL market is expected to double by 2023, according to Which 50. Regulators were slow to act, which has led to some confusion in the industry.
To make matters worse, BNPL companies are a complex vertical. This kind of business blurs the lines between payment processors, credit providers and fintech, which means that the legal requirements might not necessarily be the most adapted to their day-to-day operations.
Still, every BNPL company can agree that KYC and AML checks aren’t likely to go away.
In fact, BNPL providers are expected to see an increase in the number of checks they will have to perform in the future.
If you run a BNPL company, you have to stay on top of KYC and AML requirements. It’s not just a matter of preference; it is now a legal requirement.
And while every jurisdiction has its own idea as to what constitutes a proper KYC or AML check, the consequences of not performing them are the same:
BNPL companies deploy as few barriers as possible in the onboarding process. They essentially offer microloans, or a kind of credit card auto-topping, which has proved incredibly popular with Gen-Z users and those with no credit history.
The first issue, however, is that the accounts themselves can be stolen and used like e-wallets. BNPL is a veritable magnet for fraud.
An example of BNPL fraud
At SEON, we have prepared a full guide on BNPL fraud, but the gist of it is that fraudsters can:
And more to the point, in the context of KYC and AML, you will be under scrutiny from regulators.
The good news is that combating fraud and meeting legal requirements can both be done with the same tools, if done right. Let’s dive into more detail below.
In the world of Buy Now Pay Later, KYC and AML checks are essentially identity verification checks, also known as IDV. The goal is always the same: to get a clearer idea of who’s on your platform – whether it’s to reduce chargeback rates or to improve compliance.
Here is a list of steps you can take today:
Did you know that not all KYC requirements are the same worldwide? Or that you will need to accept at least a dozen of different kinds of ID documents to operate globally? The way to deal with that logistical headache is to plan well in advance.
Luckily for you, we’ve created two relevant articles with downloadable KYC and AML checklist templates to help you get started:
Identity verification software has plenty of advantages. It can help you meet KYC requirements. It’s automated by a third-party provider. And, if it’s set up the right way, you can scale its use as your BNPL company grows.
However, be aware that not all identity verification software is created equal. Some live video checks, for instance, can be prohibitively costly. Fraudsters, meanwhile, have growing access to deepfake technology, SIM-swapped phones and synthetic identities, allowing them to pass the checks and perform attacks such as synthetic identity fraud.
To make matters worse, you’ll have to carefully consider the issue of friction.
One of the reasons BNPL companies have been so successful is that they manage to remove payment and credit check friction.
A quick onboarding process, few verification steps, and 24/7 access are what make it the payment preference of younger generations and Gen-Z in particular.
Do you really want to sacrifice that UX at the risk of creating churn and sending users toward competitors?
Fortunately, there is a solution, and it comes from digital footprint analysis and dynamic friction.
Dynamic friction is a concept that is perfectly suited for BNPL companies. The idea is simple: You gauge risk and trigger different actions based on educated guesses. The way to guess how risky they are is to look at social and digital signals, what we call a digital footprint.
For instance, a new user downloads your app. SEON’s console tells you that:
All the above are big, red flags. So, do you really want to proceed with expensive KYC checks for this customer?
Everything points to the fact that you are dealing with a fraudster. It’s much more efficient and affordable to simply block the onboarding process for such an individual.
But what if it’s not as clear-cut?
Then you can use a risk score to decide on the next step – for instance, asking for ID verification.
The same risk score can also be a strong signal to spend more time on a manual review or to fine-tune your credit scoring system with alternative credit scoring data.
Transaction monitoring is a key feature of AML. It helps companies flag suspicious transactions, usually by targeting those over a certain threshold.
You can also look at transaction volume and history to try to understand if your user is on a shopping spree or up to something more sinister.
As a BNPL company, for instance, you want to use transaction monitoring software to ensure money launderers aren’t going through your service to hide large purchases made from illegal sources of funds.
Strictly speaking, velocity rules go above and beyond what you’d expect from simple due diligence. But they could be the key to protecting your business in the long run.
Here’s the idea:
Machine learning, meanwhile, adds another dimension to analysis, by letting artificial intelligence suggest risk rules. A robust fraud scoring engine powered by hundreds of data points can significantly boost your KYC and AML efforts, as we’ll see below.
SEON is first and foremost a fraud detection solution. But that means that we know how to help you identify your customers.
Whether it’s to understand who you’re dealing with at the onboarding stage, or throughout their actions on your platform, here’s where our features are a perfect fit for BNPL KYC and AML:
Best of all, you can deploy it all with complete flexibility. Whether you only need data enrichment modules or a full end-to-end solution, we let you integrate SEON into your BNPL platform however it makes sense for your business.
Partner with SEON to reduce fraud rates in your BNPL and save money with pre-KYC checks and machine learning
Ask an Expert
Yes. While the success of the BNPL industry took everyone by surprise, regulators have now realized that it could facilitate fraud and money laundering. You now have to meet local KYC and AML checks.
To remain competitive, BNPL companies need to reduce user friction as much as possible. This is why KYC and AML checks would ideally be performed behind the scenes, using alternative data. By deploying data enrichment modules at the onboarding stage, you can learn more about users using a single email address, phone number, or IP address.
AML Transaction monitoring is a key feature of the anti-money laundering process, which ensures you check how much your customers spend. Transaction monitoring software logs large purchases over a certain amount, to decrease the risk of money laundering.
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Jimmy Fong is the Chief Commercial Officer of SEON. His expertise in payments saw him supervise the acquisitions of companies by Ingenico, Visa and American Express. Jimmy’s enthusiasm for transparent sales and Product-Led-Growth companies drives SEON’s global expansion strategy, and he interviews both fraud managers and darknet fraudsters in our podcast to stay on top of the latest risk trends. Yes, it’s also him wearing the bear suit on our YouTube channel.
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