Loren Straub and Gabe Hawkes of Bowery Capital sat down with Jillian Williams of Cowboy Ventures to dig deeper into one of the hottest markets in fintech, Buy Now Pay Later.
The Bowery Capital team sat down with Jimmy Fong, Chief Commercial Officer at SEON, to discuss the security layer of Buy Now Pay Later (BNPL) today, as well as what it looks like going forward. SEON looks at a customer's digital footprint (social media, subscriptions, etc.) to prevent fraudulent transactions and their client list includes Afterpay, Patreon, and more. Earlier this week, SEON announced their $94 million Series B round.
What do you think BNPL is showing us about consumer behavior?
Buy Now Pay Later is not just a couple of companies - it's effectively a replacement for credit cards for Generation Z and underbanked or overburdened people. With inflation on the rise, people have less money, and paying in installments is one way to maintain people's lifestyles by spreading out the spend.
Is there a risk that a few years from now the underwriting models aren't working so well and companies start having much higher default rates?
That's early to say, because there is so much venture money in the space that they can afford riskier strategies. Past IPOs we'll see how the stock market evaluates these risks, which may lead both to more regulatory oversight as well as better underwriting models to emerge.
Why is fraud such a hot topic in BNPL? Will the Affirms of the world be the best to solve it or do you anticipate a wave of BNPL fraud specific businesses coming?
It was inevitable. The BNPL companies are competing to replace people's mobile wallets - and thus are a lucrative vector for fraud. We're seeing a lot of interest for good anti-fraud solutions as companies are looking ahead, or they suffer fraud losses when they enter new markets where their previous experience means little - be it operational wisdom or data.
Why have BNPL companies not adopted methods successful in other areas for their security (marketplace lending fraud or payment card fraud)? Have BNPL companies tried and these solutions are ineffective in this space?
It seems that a lot of these companies thought at first that just passing off chargebacks to collections will be sufficient. We know that it isn't, and there's a reputational cost to it as well. Again, venture capital probably distorts the picture as fraud losses don't hurt that much, but as the market matures this is changing, and we can say for sure that they are more proactive in battling fraud.
Will groups continue to rely on their internal products or outsource to others? Are BNPL companies building off of the already well built ID verification solutions?
Anti-fraud was always a build or buy kind of deal, but they really need external data sources to operate smoothly. The tech stack is assembled from different services, layered on top of another as different solutions augment each other. We're for example used both in credit scoring and as a form of pre-KYC, in addition to uncovering fraud rings with device fingerprinting for example. And keep in mind that on top of that they still have to use ID verification!
Is there an appetite for third party security solutions? What would an ideal security company in this space look like?
Definitely. At the heart, these are financial companies, so they don't have bleeding edge security capabilities. Their main pain is not necessarily fraud, but defaulting customers and maintaining a frictionless user experience. So we would say that if you deliver that, the BNPL companies will seek you out - but if your approach to security relies on interrupting the user flow, that might not be ideal.
How do BNPL companies stay a step ahead of security threats? Is this a problem where they have to be reactionary?
They have to learn from one another. Because that's what the fraudsters do. We see some methods "jump" from country to country. So it's important that they adopt an attitude of knowledge sharing and industry collaboration around risk & fraud if they don't want the cybercriminals to run laps around them.
If you liked “The Status of Security in Buy Now Pay Later” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog. Look out for more content on trends across fintech in the coming weeks.
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