The amount of money flowing through Buy Now, Pay Later (BNPL) services is increasing rapidly — by 2025, they are expected to handle $258 billion in eCommerce — and right now these companies are signing up merchants at a rapid clip as they compete against each other for market share throughout the world.

Merchant Onboarding Risks

While merchant onboarding is critical to growth and accessing more customers, it could also be a risky endeavor if rigorous screening measures are not put in place. Some of these risks are outlined in the table below:

Risk	Risk Type	Recommended External Data
A fake merchant that mimics a relatively new, real merchant with customers that access BNPL services	Fraud Risk	Business registry databases, phone verification, email verification
A merchant with a chain of ownership that leads to a person or entity that is blacklisted	Ownership Risk	Ultimate beneficial ownership (UBO) databases
A merchant that changes the type of goods being sold on its website	Operational Risk	Website monitoring
A merchant with very poor customer experience	Reputational Risk	Reviews monitoring

Drilling Down on Ownership Risk

In the context of ownership risk, banks and financial institutions (FIs) are required to maintain UBO information for every transaction, but many BNPL companies are not subject to these requirements. They may be well-versed in managing fraud risk, operational risk, and reputational risk, but they may not necessarily be collecting or monitoring this information on a merchant’s chain of ownership.

We assert that ownership information is valuable at the merchant level because it enables BNPL platforms to (i) verify the party through whom they are offering financial services, (ii) check that this party is not complicit in any schemes (e.g., money laundering), by verifying the identity of any holding companies and/or shareholders, and (iii) monitor any shareholder changes to ensure that a change in ownership doesn’t materially change the merchant’s offerings. Recently, the Demyst team interviewed Sayari Labs, a data partner in the Demyst ecosystem, to discuss the best practices in accessing shareholder and ownership information about businesses.

While BNPL organizations may not be legally required to collect UBO information, they frequently partner with financial institutions to offer installment loans, and those firms are subject to tighter regulatory requirements. In these cases, FIs may pass their UBO requirements onto BNPL providers.

Although BNPL companies may never be formally required to track UBO information, it could make the difference between success and failure when it comes to risk management decisions. 

Active Merchant Monitoring

Based on our experience in the BNPL space and across the lending space, globally, we advocate for active merchant monitoring across a portfolio because ownership information, revenue streams, and other operational variables can change rapidly, especially in smaller companies. Timely updates to that information ­– like advance notice of a merchant’s changing reputation, which might signal a wave of upcoming chargebacks ­– are essential.

UBO information is just one component of merchant data, which is why the active use of external data sources can play an important role in tracking and managing business changes to avoid unnecessary risk. Knowing the chain of ownership of a business is a critical tool for understanding the likelihood of fraud.

For more information about assessing credit risk, onboarding global merchants, and small business commercial lending, watch Demyst’s webinar with Prashant Reddy and Gloria Dumas.