Until recently, the buy-now-pay-later (BNPL) industry has been largely unregulated, and lenders and retailers have been pretty much free from regulatory responsibilities. However, this has recently changed in the UK with the announcement of draft laws from the UK government which will give consumers additional rights and protections.  

These new laws ensure greater consumer protections including that all BNPL advertising is clear and fair and provides shoppers with Section 75 protections for BNPL purchases. Although not yet explicitly confirmed, stricter affordability checks are also highly likely to be introduced by the FCA to strengthen the regulation of interest-free BNPL credit agreements and make companies responsible for the verification of their customers financial status.

This change is much needed and, in my opinion, can’t come soon enough. Even though affordability checks and screening has already been widely available for a number of years, our own independent research revealed  less than a fifth (17%) of people in the UK opening a BNPL credit agreement were asked to take an affordability check, compared to just over a third (36%) of people opening a credit card or loan. We also found that:

• 81% of UK young adults – aged between 18-24 – signed up to a new online account in the last 12 months compared to 48% of people aged 55+ and 67% of people overall
• 19% of 18-to-24-year-olds have opened BNPL accounts compared to 6% of people aged 55+ and 14% of people overall
• 17% of females have opened up BNPL accounts compared to 8% of males and 14% of people overall.

As the popularity of BNPL grows, and with the cost-of-living crisis pushing people towards increased borrowing, many consumers are still at real risk of overspending and falling into debt.

While some BNPL companies have heeded the FCA’s warnings around affordability and some have started to report into credit reference agencies prior to the government’s announcement regarding new regulations, many missed the opportunity to get a better handle on affordability and Know Your Customer (KYC). Fortunately, this will soon be a must-have for BNPL businesses, protecting consumers to far greater extent.

What’s the benefit of Know Your Customer (KYC) in BNPL?

Responsible identity verification does not stop at confirming that a person is who they claim to be, but rather, it considers a comprehensive data set that paints a much clearer picture. Through biometric data and other alternative data sources, businesses are now able to access information such as an individual’s level of risk, their affordability, digital behaviour patterns, preferences on channels and payment methods as well as their interests.

These alternative datasets offer powerful insights to businesses, leading to not only safer and affordable transactions and agreements, but also knowing what the preferred communication and authentication channels are will increase conversion, whilst improving customer satisfaction.

The Bias Behind KYC

Traditional methods of identification, such as credit history and physical documents, means that digital identity isn’t equal for everyone especially when it comes to verifying the identity of young adults and checking on their affordability.

Affordability screening, age verification and the use of wider sources of data, including biometric information offers a much broader view of our customers’ individual identities. With consumers having come to expect nothing less than a great customer experience and fast onboarding, this ‘expanded KYC’ along the customer journey enables BNPL lenders and others, not only to get to know their customers better, reduce the risk of bad debt and lend more responsibly, but also to anticipate their needs, bespoke offerings and increase loyalty

KYC and Fraud Prevention

Our own independent research revealed that almost a fifth (18%) of 18-24-year-olds in the UK had personally been a victim of identity fraud in the last 12 months – approximately 850k people – compared to just 3% of adults aged 55 and over.

As the biggest users of BNPL loans, young adults are potentially the most vulnerable demographic to this type of fraud, identity fraudsters are targeting young adults at an alarming rate, with many falling victim to misleading BNPL promotions and fraudulent social media scams.

Knowing a customer’s biometric data allows us to map their behaviours, and therefore identify anomalies. On top of verifying who they say they are, the new KYC concept offers a real understanding of the customer, demonstrating an obvious natural expansion towards better verification and therefore better fraud prevention.

The Future of BNPL

With the FCA’s new regulations now moving forward, BNPL lenders will soon be held accountable for their actions – or lack thereof – in customer identification. Lenders and retailers shouldn’t wait any further to introduce these measures following the next stage of consultation, but benefit right now from KYC, including the true picture on affordability.