Startup companies with names like TradeDepot, Wasoko, MarketForce, M-Kopa and CredPal might not be recognizable yet, but having collectively raised over $350 million in funding to develop the Nigerian BNPL market, they surely will be.
As the vast majority of Nigerians have never had access to bank credit or a credit card – only 2% of the population are “banked” – companies offering BNPL are looking to both increase Nigerians’ spending power, while also making their own profits as micro-creditors.
BNPL models, short for Buy Now, Pay Later, are offering a way to acquire an item online, and pay for it in installments over weeks or months, something that previously required a credit card. This is essentially a micro-loan process, where the customer says what they want, the BNPL pays the cost to the product retailer, the customer receives their product and then pays the BNPL back, interest-free. The entire customer journey is kept as simple and frictionless as possible to maximize the number of customers that reach the checkout stage, where in a traditional ecommerce model, a customer might get to their “basket”, see the price, and abandon their digital shopping cart.
Thus, BNPL’s target market is the 98% of the (eligible) population that is accustomed to scrimping and saving for months in order to pay cash for, say, a notebook computer for their child to study with. Any vertical reporting that 98% of any population is its target is sure to get attention. In 2021 alone, the Nigerian BNPL market was worth about $325.4 million, with exponential growth predicted moving forward.
As so many BNPL providers look to both create a market and fill the space within it, gaps will inevitably form. But what gets through these gaps, or who?
Sadly, the BNPL payment model offers ample potential for fraud, and the fraudsters multiply year-on-year.
There is no one fraudulent act that defines all BNPL fraud, and every party involved in the model might feel the sting of the crime, including the merchant, account holder, and the BNPL provider itself. Fraud prevention tools exist and can be deployed to great effect, but the fraud risks associated with the buy now, pay later model are both inherent and potentially cultural.
Some examples of fraud typical to the BNPL ecosystem that any company looking to make headway into the market should be aware of include:
- Friendly/first party fraud. Has a customer claimed that a purchase was made accidentally, or have they simply forgotten they made the purchase? There is little recourse when such a claim is made, and the company will likely have to issue a refund.
- Never-Pay Fraud. Did a customer make a new account, purchase one item, then disappear from your system, never paying for their item? This is a common form of new account abuse, and could be a real customer who only intends to use the service once, or a hacked ID purchased online in bulk. The low-friction user authentication of BNPL makes this much easier for fraudsters.
- Account Takeovers (ATOs). Account holders registered to a BNPL are as much in danger of getting their password stolen as anyone else, and this can lead to their whole account being taken by a cybercriminal, who will then likely drain the account or make unauthorized purchases.
Minimizing the potential losses that these kinds of fraudsters might bring about is a huge challenge, but can be aided by deploying the right fraud solution, as well as some careful strategizing.
Consider that a credit card can be seen as a financial institution’s sign of trust, but that trust has traditionally been in short supply in Nigeria. Indeed, Bank of Industry Limited, the nation’s largest development bank, notes that almost 100% of its entrepreneurial loans never yield profits, suggesting that some people who receive loans might not feel the burden of a good or bad credit score. For those who have never had the opportunity to get a credit card, much less a credit score, why would they?
Educating a customer base on the realities of the BNPL system, even an interest-free one, will be an important step in the journey towards success.
Even with customers who care about their credit score, worst case scenarios exist. Consider this sadly common situation:
- A fraudster, using hacked personal information, manages to take over a trusted BNPL account.
- The fraudster orders a high-value item from a vendor in the marketplace, arranges for it to be sent to somewhere they can collect it safely.
- They disappear with the unauthorized item.
- Weeks later, the real account holder discovers the fraudulent purchase when they are asked to pay for it, even though they didn’t receive it.
- They request a chargeback, and rightfully receive it.
- In the end, the customer’s account is compromised, the retailer has lost an expensive item, and at best, the BNPL provider can issue a refund to the customer, or else the associated bank will levy a chargeback against the BNPL.
It’s a lose-lose-lose situation for everyone except the criminal. Fighting more sophisticated attacks like this requires a more sophisticated tool than an education campaign. To curb fraud like this, it is essential to develop a software stack that:
- Automates a risk score based on rules. Fraud prevention solutions should be assessing customers during their shopping experience, checking for behavior traditionally associated with fraud, like originating from a VPN, seemingly random or blacklisted IP.
- Has customizable rules. The newness of Nigeria’s BNPL landscape is what makes it so volatile. What trends in fraud will emerge? A fraud solution should allow a security team to develop insights into how fraudsters are committing their crimes, and then allow that team to put rules in place to stop those instances specifically.
- Uses strong data enrichment. Each data point that the customer is required to enter– email, address, phone number – represents more friction, which BNPL hates. However, with data enrichment, each of those points might expand into enough data to be confident that the customer will be a good one, rather than a fraudulent one. Beyond this, a data-enriched phone number or email address can also provide a complete digital profile of a user, which BNPLs can scrutinize as a form of soft credit check, then apply that data to segment users into potentially high-value, or potentially fraudulent.
With some studies showing that Nigeria’s BNPL market will grow to almost $1.2 billion in the coming years, companies have only begun to scramble for their piece of the pie. The ones that will be successful are the ones that have the tools in place to walk away with their slice, rather than the crumbs left behind by fraudsters of both the low-tech and high-tech varieties.
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