Young woman using a credit online with a tablet

In the UK last year, use of buy now, pay later at online checkouts nearly quadrupled[1]. But where cash flows, identity fraud usually follows

Watch our latest video above covering BNPL ID Verification & Fraud prevention, with our topic experts Tom Gadsden, Traci Krepper & Rob Haslingden.

According to a 2020 Worldpay report[2], BNPL fintechs are growing at a rate of 39 per cent annually in the UK, with an expectation that they will double their e-commerce market share by 2023. Just six years after the market leader Klarna launched here, almost 1 in 10 UK consumers[1] is using Buy Now, Pay Later at the checkout.

However, fraud is also on the rise. As Martyn James of Revolver, the market leaders in consumer-complaint resolution, says, “Increasingly, we’re hearing from people who have found that some businesses are making it too easy to set up fake accounts. When you reduce the number of checks you make to speed up creating new accounts, you increase the risk of fraudulent activity.”

This leaves BNPL lenders with a tricky question. Can they tighten up ID checks, while maintaining the smooth access to credit that has fuelled their growth?

The current approach to ID verification in BNPL

Unregulated by the FCA, most BNPL lenders take a light-touch approach to identity verification. Why?

  • The value of the loan is generally small – £65 to £75 on average – so the risk exposure is also relatively small.
  • The BNPL model is built on keeping the user experience as slick and fast as possible. Unlike most mainstream lenders, they need to make decisions in the fractions of seconds it takes a buyer to make a purchase.
  • They are not regulated by the FCA

As such, many only perform the most basic check on individual users. This is:

  1. ID validation. This simply – and robustly – answers this question: Is there someone out there in the real world who matches the details given?

What you should consider as a minimum for identification

The ID validation and verification starting point for BNPL lenders has two extra parts:

  1. ID verification. This step links the person inputting the data with the details being inputted. Is the person entering the details who they say they are?
    This is vital to fraud prevention and may well be required should the FCA choose to regulate the sector.
    However, BNPL lenders cannot afford to introduce significant friction into the actual sales experience.
    The easiest way to approach this may be to validate a customer when they first set-up their account. This can take place outside of the payment journey and can involve a variety of data sources including bureau and or Open Banking. It means you can verify the individual and the account from which they can pay-off their loan without impacting on the buying experience.
  1. Contra-indicators check. This looks at details such as the user’s digital ID. For instance, is the application from an unexpected location or IP address? Is that IP on a fraud watchlist? This is invisible to the consumer and can be done during the payment journey.

BNPL lenders need to think carefully about how they bring in tools to minimise friction whilst keeping organised fraud rings – such as social engineering or money mules – out of their systems

Robust checks without getting in the user’s face

Experian can provide all three recommended checks. And – vitally – it can do so without slowing the purchase. We don’t have to “be up in the customer’s face”, as Tom Gadsden, Experian Product Director for Identity and Fraud, puts it.

This allows lenders to cut risk markedly without any impact on the speed and smoothness of the customer journey.

Our approach blends three data sources – client, third-party and Experian’s own uniquely rich and deep data sources – to run tools that bring people through BNPL safely, effectively and with minimal friction.

BNPL is under the spotlight

BNPL lenders are facing greater scrutiny as are the tools they use to verify identity to mitigate risk to consumers, retailers and themselves

In October 2021, the Treasury announced[3] that BNPL is “likely to present greater risk of consumer detriment” than other exempted products.

For BNPL lenders it is crucial that this rigour does not come at the cost of user experience.

How should BNPL lenders respond?

At the most robust end, BNPL transactions could in theory become subject to full Anti-Money Laundering (AML) checks. That would make every transaction in effect like a credit card application, but that seems unlikely.

At the light-touch end, regulation could simply involve a duty to report on problems that lead to consumer detriment.

The Treasury consultation document, issued in October 2021, suggests that the government approach will be “balanced and proportionate” and “adapted to the business model”.

However, in anticipation of further changes it is prudent for BNPL lenders to be thinking now about how they might improve the robustness of the ID checks, and how best to fit these into the user experience.

Not all checks have to be a visible part of the buying journey. You don’t need to sacrifice diligence for deftness. Using the right tools with the right data sources lets you check name, address, age, documentation, bank details, employment status and more in real-time. With over a billion records and a wide choice of integration methods, Experian can deliver all manner of rapid ID checks.

What are the risks of not verifying ID in the background?

There are at least four key fraud risks for lenders:

  • New-account fraud: Using false or stolen documents to set up new accounts in someone else’s name.
  • Repaying with a stolen credit card: Fraudsters pay their debts using stolen credit card information.
  • Never-pay fraud: Fraudsters use their own data, using things such as burner phone numbers and drop-off addresses, to buy with no intention of paying.
  • Account takeover: attackers use phishing, credential stuffing, and SIM-card cloning, to take over a legitimate account and make fraudulent purchases.

More robust ID verification significantly increases protection against the first three and makes the fourth harder.

Consequences of fraud for BNPL lenders

  • Reputation damage. Being seen as vulnerable to fraud undermines the confidence of consumers and retailers who partner with BNPL lenders.
  • Costs. Fraud costs BNPL lenders money. With many on tight operating margins there is a pressing need to keep fraud to a minimum.
  • Loss of merchants. Merchants do not want to be associated with payment methods where consumers have unsettling experiences.
  • Loss of customers. A US survey[4] suggests that more than a quarter of victims of account takeover would stop using the service affected in future.

So, with the popularity of BNPL growing and consumers enthusiastic about the experience, now is the time to start work on ID verification. Contrary to fears in the sector, ID checking can be safe, strong – and invisible.

[1] FCA publishes review into unsecured credit market, FCA, Feb 2021
[2] The Global Payments Report, FIS – Worldpay, 2021
[3] Regulation of Buy-Now Pay-Later,, October 2021
[4] Account Takeover Fraud and the Growing Burden on Business, Sift, 2020