Catching up to BNPL in Accepting More Legitimate Transactions

BNPL companies have an advantage over issuing banks in assessing transaction risk, but there is a way for them to level up. Read to learn more.
by Roenen Ben-Ami
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Published: March 14, 2023
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BNPL Justt AI - Kipp

The world of eCommerce is based, for most customers, on the use of their credit card. As long as you stay within your credit limit and make payments on time, the process is generally smooth, predictable, and frictionless. 

Until it’s not.

In recent years, the Buy Now Pay Later (BNPL) approach has become more and more popular.

It appeals to customers for one key reason.  It spreads out payments over time (assuming you are not creating a non-stop cycle of catch-up with frequent purchases) is an enticing way to be able to make a purchase today, even if you can't take the all-at-once hit to your bank account. 

Moreover, if you have actually hit your credit limit (or would, with this purchase) and are not permitted by your bank to make that larger purchase, it becomes a choice of last resort. In that case, making smaller payments over the course of a few months, generally without interest or surcharges, becomes a particularly appealing workaround.

Can you call the bank and ask for a temporary or permanent adjustment to your credit limit? You sure can — but most of us don't. It's a hassle, sometimes requires paperwork to justify the request, and often an algorithm simply decides that you are not worthy.

Fintech companies offering BNPL (as well as merchants who manage it on their own) understand that credit limits are not always up to date or truly represent your ability to pay over time; it’s an abstract figure based on a few factors. The result: Transactions that fail the conservative litmus test employed by credit card issuers find their way over to the BNPL companies — where the transaction does go through. The question is, why would the BNPL company take such a risk when the bank would not?

A secret weapon for assessing risk

While both banks and BNPL companies are interested in keeping customers, the banks need to be more conservative for one fundamental reason: they don't know anywhere near as much about the transaction as the BNPL company does. Specifically, a BNPL company is integrated with the merchant (or is the merchant) and therefore knows, at the very least, what the product is. There are certain product categories (home improvements, vehicles, vacations) that are statistically lower risk. There are also shopping patterns (extensive comparison of items, ongoing large purchases, luxury items) that the BNPL company may be privy to for a particular customer. This allows them to make decisions on a case-by-case basis, leveraging this additional background information to more accurately assess the risk of a customer's failure to repay.


Banks can get that data too

The solution, then, is for credit card issuers to establish a similar type of collaboration with merchants who can tell them more about the particular purchase and perhaps about the customer's general profile or shopping patterns. If, for instance, this customer makes frequent purchases using another card, the credit card issuer may not have this information, while the merchant would, and could share it. With an automated, real-time mechanism in place, a platform like Kipp can rescue revenue for both parties by increasing the percentage of accepted payments: each questionable transaction can be — just before a decline — sent over to the merchant requesting any additional data points that may re-assure the bank enough to accept the transaction. With this strategy in place, banks can get much closer to the acceptance rates of the BNPL alternative and keep customers from switching to a solution that bypasses the credit limit roadblock.

To learn more about how BNPL schemes compare to credit cards in the world of payments, read more on the Justt blog.

This was article was contributed by Kipp, a Fintech SaaS provider that enables card issuing banks and eCommerce merchants to collaborate in real time to approve legitimate transactions.

Written by
Roenen Ben-Ami
Co-founder & Chief Risk Officer at Justt. I am an all-around payments expert and a veteran commissioned officer. I previously led the Chargeback and Merchant Risk teams at the payments service provider Simplex, which now successfully recovers millions of dollars a year using the best practices I developed.
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