In today's Finshots we discuss how frauds within the ecosystem could derail the e-commerce growth story in India

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The Story

When was the last time you shopped online?

If your answer was ‘yesterday’ or ‘I just bought my groceries 2 minutes ago’, then you probably recognise the fact that online shopping is now an inseparable part of your life. In fact, India has 230 million online shoppers as of July 2020.

And e-commerce companies have been the biggest beneficiaries. But with the growth of online shopping, fintech companies have also got in on the action, incentivizing people some more to make that extra purchase.

We are talking about BNPL companies. Companies that offer to pay on your behalf up front. Companies that dole out short-term credit as and when you make a purchase. These apps have soared in popularity and this has given rise to an interesting problem — a problem that happens to be the basis of today’s story.

BNPL frauds!

A new study from Juniper Research says that e-commerce companies could lose $48 billion globally to online payment frauds next year. This figure is likely to blow up even further with newer alternatives i.e. digital wallets and BNPL (Buy Now Pay Later) apps.

In fact, the research report says that “…the potential of fraud with BNPL is a major risk going forward. Given the delayed nature of BNPL payments, fraudsters can make several illegitimate payments using stolen card details before the fraudulent activity is identified, creating significant risk.”

Now there are many ways in which fraudsters could perpetrate BNPL frauds. Bad actors could take over existing BNPL accounts belonging to legitimate customers and make a slew of purchases before the real owner figures out something is amiss. They could also exploit lax Know-Your-Customer (KYC) norms to create new accounts with stolen credentials. Or they could defraud the merchant by making payments without having any intention to pay for them. In most cases, BNPL providers may have to take the hit themselves. This affects their financial position. In other cases, consumers may have to prove their innocence if they became victims of identity fraud.

All this imposes a massive cost on doing business. It’s bad for consumers. It’s bad for e-commerce apps. And it’s bad for the banking system.

But you could turn around and ask — Isn’t fraud a feature of the digital payment ecosystem? It isn’t simply limited to BNPL apps no?

Yes, you’re right. But BNPL apps have soared in popularity, both globally and in India. The BNPL market is set to surge to about $50 billion, by 2026, from just $3 billion today. It could surpass personal loans and the credit card industry at this pace. And with this kind of scorching growth, you'll also see increasing cases of fraud.

So what do you do about this malady?

Well, two things - Regulations and increased compliance. As BNPL companies mature, they will inevitably impose better security measures to prevent identity theft and fraud. There’s also the fact that regulators are now waking up to the threat of BNPL frauds and holding the incumbents accountable.

In India, the RBI is tackling fraud by using brute force. For instance, RBI’s recent regulations prohibit buy-now-pay-later companies from loading credit lines to pre-paid instruments. In other words, the guidelines forces banks and NBFCs to disburse loans directly to the borrower’s bank account.

And while you may think this isn’t considerably different from the usual BNPL offering, that isn’t entirely true. A BNPL provider may assess your creditworthiness at the time of purchase. But banks usually assess your creditworthiness before doling out a loan. They spend a considerable time evaluating if you’re actually creditworthy before sending money to your bank account. So if a BNPL app were handicapped to load credit lines into pre-paid wallets and make credit assessments on the fly, they can’t offer the seamless experience you’re so used to.

The whole allure of BNPL boils down to the frictionless journey. If using the app ultimately means you have to avail of a personal loan, then you probably won’t use it as much. Meaning, the added barrier alone could bring down the incidence of fraud by virtue of making BNPL less appealing.

And yes, there’s also been talks of bolstering KYC processes to limit cases of fraud. But we will have to wait and see how the RBI and the fintech ecosystem enforce the necessary checks without stifling growth.

So yeah, e-commerce companies and BNPL apps have spurred consumerism to a certain degree. But if we don’t find ways to limit fraud in the ecosystem, then that could derail the growth story pretty quickly.

Until then…

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