The buy now, pay later (BNPL) market has soared during the pandemic, in tandem with the explosion in e-commerce. And its expansion appears to have no end in sight. According to fintech research firm, CB Insights, the global BNPL industry is expected to grow 10-15 times its current volume by 2025, topping $1tn in annual gross merchandise volume. Proponents argue that it fulfils a consumer need and provides a simple and lower cost financial alternative to payday loans and credit cards.
Leaders in the BNPL arena include Sweden’s Klarna (Tech Talk video), the US’s Affirm and Sunbit, as well as Australia’s Afterpay (acquired UK’s Clearpay and Spain’s Pagantis), India’s LazyPay, New Zealand’s Laybuy (Tech Talk video), Saudi Arabia’s Tamara, Singapore’s Atome and UK’s Zilch, to name but a few. They all deploy technology to deliver a slicker customer experience and faster decision-making. Sunbit, for example, boasts of approval rates of 90%, with a 30-second approval process for financial transactions of between $60 and $10,000.
Obtaining short-term credit (usually four to six weeks) at point of sale (POS) with a frictionless experience, without the need for credit checks on smaller purchases, is an attractive proposition. However, it is not one without some risk for the consumer as BNPL is a largely unregulated space. As with other forms of credit, there are harsh penalties for missing payments and hikes in interest charges if the credit term is extended. And while losses for BNPL financing are low at the moment, there is concern that defaults will spike when a recession occurs.
Amid fears of rising consumer indebtedness, regulators are starting to take notice of the BNPL market. For example, in February the UK’s Financial Conduct Authority (FCA) published the Woolard Review, which highlighted the “urgent need” to regulate all BNPL products to protect consumers. It also proposed an immediate Financial Services Bill to address this area of the market. An FCA policy document on this topic is expected to be published in July.
Such regulatory frameworks might even help drive market expansion, according to consumer research platform, Attest. In a survey of 1000 UK consumers, it found that 49% of UK citizens that have used a BNPL service in the past 12 months stated they would spend more using BNPL knowing that credit checks had taken place and with more transparency as to affordability.
Banks should have better insight into their customers’ financial standing and credit history, and can therefore assess risk more accurately
Increased regulatory oversight also comes at a time when more banks are entering this space. For example, in November Barclays moved into the BNPL sector through a partnership with Amazon in Germany and now the service is being extended to the UK. In April, Barclays US partnered with fintech firm Amount to offer merchants a white label point-of-sale BNPL financing service, which is set to go live later this year. Also in April, Russia’s Tinkoff Bank launched the country’s first BNPL service, called Dolyame.ru.
In March, Commonwealth Bank of Australia launched its own BNPL service, which will be rolled out to eligible customers from mid-2021. The bank’s offering, which it claims has no additional fees or costs to businesses, will be available alongside its existing Klarna BNPL product.
This begs the question: are banks better placed to provide more secure, reliable and sustainable BNPL services? Theoretically, yes. They should have better insight into their customers’ financial standing and credit history, and can therefore assess risk more accurately.
Yet to date, most have not been able to use that customer data to provide instant credit decisioning, nor have they managed to break down the data silos within the organisation to create a holistic view of the customer. These are two important areas banks need to address.
In addition, to take market share from the established fintechs like Klarna and Afterpay, banks also need to digitally re-engineer the front-end processes to deliver that slick and seamless customer experience, with that digital transformation running all the way through to the back office.
Deciding to enter the BNPL space shouldn’t be driven purely by a fear of missing out. Banks should be motivated by the desire to provide their customers with a much better service that truly solves their credit needs.
Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight
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