Pulse Check on Buy-Now-Pay-Later (BNPL)

Buy-Now-Pay-Later (BNPL) is the newest product in financial services.

Despite the spread of providers and availability through retailers, BNPL is not mainstream. The messaging of credit card issuers being under attack or replaced won’t be happening anytime soon. The opposite is actually taking place with Mastercard & Visa developing BNPL partnerships or product sets of their own.

There’s also a mixed bag when it comes to regulation (or lack of) across the globe. Some countries are moving towards specific guidelines, while others are waiting to see how the market reacts with usage & delinquencies.

With all the open items, Buy-Now-Pay-Later is still expected to be a driver of innovation for the financial services sector — especially with embedded finance. We explore more in this deep dive (TL; DR):

  • Current friction with BNPL;

  • BNPL no longer a solo act — tag team effort with card networks & issuers;

  • Regulatory pulse around the world;

  • Innovating for BNPL 2.0;

  • Expectations for 2024;

user Friction with BNPL 1.0

In replacing a traditional credit card as a form payment, the alternative must be faster — or at the minimum the same speed for fulfillment.

Buy-Now-Pay-Later checkout options can take up to a minute for end-to-end completion (see graphic below); versus a card which is only 6-10 seconds. With in-person point-of-sale (POS) transacting, BNPL could feel like minutes. Speed in payments is critical for customer experience — innovation needs to come with velocity.

Besides lag time, refunds are much more complicated when payment comes through BNPL.

This puts pressure on merchants to come up with clear and easy-to-manage return policies. There’s confusion on contacting the BNPL provider or merchant for issues. If its too complex for a customer to understand upfront, chances are that they won’t use the product.

Lastly, there’s also noise when it comes to financial health impact.

Opponents to BNPL argue that this payment option is increasing the level of debt for consumers. Many fear that this is hurting those living paycheck-to-paycheck.

However, Gen Z & millennials are leveraging BNPL to establish and build credit, especially those without credit cards. These consumer segments have the highest usage rates with these programs across all age groups.

BNPL WORKING WITH CARD NETWORKS

Buy-Now-Pay-Later (in tandem with Mastercard and Visa) instantly increases reach through existing merchant card networks.

Instead of printing plastic over and over again, virtual cards are the preferred path for transacting with BNPL. These cards can be designated for a one-time purchase and pre-authorized for spend amount, specific merchant, and location. There’s also the ability to tokenize cards into Apple & Google Pay wallets for easy checkout (online or in-person).

From a global perspective, this collaboration can fall apart in countries in which users are unaccustomed to card usage.

In Southeast Asia, for example, QR codes and other alternative payment methods are more popular. Some software providers are removing this blocker to global expansion by using scan-able codes, then completing a mobile form that authorizes the purchase through an installment plan.

This leads to new opportunities with closed-loop wallets acting as peer-to-peer transfers between merchants and consumers. However, there’s added friction as both sides need to set up accounts and bank authorizations before attempting a purchase or charging a client. Not all users will be willing to create a new account, download another app, and connect their external bank account when they already have other wallets.

Card issuers are fighting back with post-purchase installment plan options of their own as well.

Customers are given a choice to choose a set of transactions that cleared and break out interest-free payments over time (beyond the standard 4-part plan of BNPL). For clients, there’s the flexibility to choose the payment period and which purchases should be covered after checkout. This places less pressure on approvals & lag time at point-of-sale, but isn’t a true BNPL program.

TACKLING REGULATION AND COMPLIANCE

The rates of delinquency for BNPL seem to start outpacing those of standard credit cards.

Since purchases are stretched across 1-2 months, the total spending for consumers increases. This can lead to overspending behaviors and households consuming beyond their means. The inability to pay creates defaults + losses.

It doesn’t help that BNPL providers only use a ‘soft credit check’ to quickly qualify customers. Credit bureaus in the US (TransUnion, Experian, Equifax) are working towards including BNPL programs & repayments having a place in credit reporting, but this will take time.

Many regulators are concerned about qualification, consumer protection, and increased debt levels. Across the globe, countries vary on their stance towards Buy-Now-Pay-Later:

  • United Kingdom – The government is active in increasing its scope to cover BNPL providers that are currently unregulated. The Financial Conduct Authority (FCA) also advised companies against unfair practices;

  • Europe – This region tends to take the lead on regulation. The European Commission requested revision of the Consumer Credit Directive to include BNPL. However, there’s a notion that certain program structures should fall outside of the bill;

  • France – Instead of falling in the consumer credit arena (if certain guidelines are met), France places BNPL under the purview of banking and its associated rules;

  • Germany – License requirements may be necessary based on the type of BNPL program and complying with current exemptions;  

  • Australia – BNPL providers aren’t concerned about regulation yet, but do follow their own industry code of conduct. Its scope falls under the Australian Securities & Investments Commission. The government published a recent white paper that clarified regulatory gaps;

  • Hong Kong – The Hong Kong Monetary Authority (HKMA) views BNPL in the same way as unsecured personal loans, and listed this stance on a public website. The agency also advises consumers of the risks and separately sent a document to financial institutions;

  • South Africa – BNPL is outside of the regulatory scope for the National Credit Act of 2005, which covers consumer protection with credit products;

  • Canada – No requirement needed for BNPL providers to register themselves, but following existing rules is still enforced. A study on BNPL by the Financial Consumer Agency of Canada (FCAC) shows regulators following closely the program’s developments;

  • United States – The Consumer Protection Financial Bureau (CFPB) is pushing for increased regulation of these programs across financial services; Federal Trade Commission (FTC) also mentioned that consumer protection extends to the FTC Act;

From one end of the spectrum to another, countries are either (i) maintaining a conservative eye on Buy-Now-Pay-Later or (ii) soon to actively regulate these programs as a credit or banking product. Overall, no regions are losing sight of BNPL 1.0 and its impact.

buy-now-pay-later product types for bnpl 2.0

Similar to traditional credit cards, consumers use BNPL in two distinct ways.

Either as ‘transactors’ that pay off balances in full each month (with no interest) OR ‘revolvers’ who carry a balance from month-to-month (and pay interest).

The initial ‘Pay in 4 with 0% interest’ works well with transactors, but not with revolvers who would rather extend the payment term. Offering multiple term options that a customer can choose from can make sense, especially if a large item is being purchased.

Some customers can also vary their buying behavior based on time of the year (such as end-of-year holidays). Having multiple product types or a hybrid-option (‘Pay in 4’ becoming a longer term loan) is the next level for Buy-Now-Pay-Later. It allows for purchasers to dynamically change payment arrangements after a transaction has been made.

BNPL providers can also develop better offers for top clients that have a history of no late or missed payments. Higher discounts, more cashback incentives, and other promos can lead to increased spending volume that doesn’t go through traditional debit or credit cards — eliminating interchange fees for merchants.

Gen Z is leading the way in terms of BNPL usage. Providers and lenders should stay close to this demographic in narrowing down what BNPL 2.0 should look like.

what to expect in 2024?

Buy-Now-Pay-Later is not going away.

Regulators will allow it to continuing evolving & developing, but keep it within a small framework.

BNPL providers are learning how to improve adoption, lower delinquency & losses, and improve the overall customer experience.

The industry is building momentum towards Embedded Finance. Payments is the sector that’s most developed here, as an embedded solution. Banking and insurance is coming along as well, and slowly being defined with the help of Banking-as-a-Service (BaaS) providers and InsurTechs (tech companies with insurance solutions).

Credit is still starting out as a new proposition. Buy-Now-Pay-Later will fast forward embedded lending in the next 18 months.

Key hurdles of regulation, capital providers, and managing adverse impact to consumers may slow down development. However, it’s up to today’s BNPL leaders to scale mindfully and avoid damaging events that can trigger restrictions down the road, which may stifle the pace of innovation.

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sector, bankingWilliam Morales, FounderComment