Fraudsters are circling the buy now, pay later (BNPL) arena in search of ways to scam consumers and merchants. In this month’s Alternative Payments Tracker, Klarna’s Matthew Suraci explains how 100 different data points helps them identify the good customers from the bad actors.
Consumers have been leveraging a wide variety of innovative payment methods recently, from QR codes to contactless mobile payments and countless others. However, few are as popular as buy now, pay later (BNPL), with nearly 56% of Americans saying they used this method last year, up from almost 38% in 2020.
One player in the BNPL scene is Klarna, which first launched in the U.S. in 2015 and now has 22 million users around the country. The pandemic has contributed to much of the company’s growth, both encouraging consumers to shop online and incentivizing them to seek out ways to save more money.
“There are fundamental shifts happening in how consumers shop, pay and bank,” according to Matthew Suraci, head of business development and partnerships at Klarna. “The pandemic accelerated online shopping and demand for BNPL services, which offer frictionless, safe and convenient alternatives to traditional, high-cost credit cards.
“Using a buy now, pay later option offers shoppers a lot of advantages that they’ve come to expect — the most obvious is the ability to purchase items now and split the cost into interest-free installments, which offers greater cash flow control.”
BNPL providers require stringent authentication measures to ensure no bad actors infiltrate their systems, however. Suraci recently offered PYMNTS an inside look into how Klarna authenticates its users without inconveniencing legitimate shoppers.
The Benefits of Leveraging BNPL
BNPL services have grown increasingly popular over the past several years not only because they have the potential to make merchandise more affordable for consumers, but also because of their ability to offer customers more shopping flexibility. Customers are less financially entwined if they decide to return an item, and they also can access a more holistic look at their spending habits in general.
“Having the ability to divide the payments for both planned and unexpected costs into interest-free installments allows customers to better manage their cash flow, and they also benefit from trying items and returning those they don’t want or need without money leaving their account,” Suraci explained. “They also benefit from the ease of being able to manage everything in one place. The [BNPL] app is very visual so customers can get an at-a-glance look at spending, payments [and] package tracking and even manage returns.”
Partnering with BNPL providers offers several advantages as well, he said. Studies have found that these options help drive up sales and conversion rates, making them especially valuable for smaller merchants looking to compete with national chains that can offer better discounts.
“In addition to appealing to a wider audience, retailers also benefit from an increase in sales and a boost in average order values,” Suraci said. “[BNPL] tools and services also help level the playing field for small businesses struggling to stay afloat … as offering our payment solutions to their customers helps them compete with giants like Amazon.”
These services are useful only for as long as they are safe, however. Proper user authentication is key to ensuring secure shopping experiences.
Authenticating BNPL Users
Like any digital purchasing method, BNPL services can make tempting targets for bad actors. Stopping this fraud can be a tall order, but Klarna leverages a behind-the-scenes risk engine to determine which users potentially could be fraudsters.
“We have strong anti-fraud controls in place to protect our customers and prevent fraudsters from making unauthorized purchases,” said Suraci. “Based on our experience over the past 16 years, we have developed a sophisticated in-house risk engine. When a shopper attempts to place an order, we check over 100 data points [for verification].”
The real challenge in customer authentication lies not in identifying the fraudsters, but in ensuring legitimate customers are not inconvenienced. A rocky shopping experience or a false positive could result in customer abandonment, costing merchants even more than the fraudsters do.
“Establishing trust online between businesses and customers is critical in terms of unlocking the potential of online commerce,” Suraci said. “Achieving that without comprising the overall customer experience is a challenge for most businesses. With our customer authentication platform, we make it easy for businesses to establish this trust, comply with regulations and tailor the experience to offer their customers a quick and safe way to identify themselves.”
BNPL services currently are on the upswing, but if bad actors compromise them, they quickly could lose their appeal. Strong yet convenient authentication procedures will be critical to ensure the industry’s future.
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