BNPL teaser

Is the increased regulatory activity around buy now, pay later good news or bad for the financial services industry? Heather McKenzie reports. 

The numbers around the buy now, pay later (BNPL) market are impressive — it is a market estimated to be worth more than $5bn and predicted to grow by 26% to 2030. It is also a market with a sting in its tail, as Klarna, one of the leading BNPL fintechs, learned when its valuation plummeted from $46bn to $6.7bn in its latest fundraising round.

An e-commerce payment method whereby consumers can delay payments or divide them into instalments and be in immediate receipt of goods suits consumers hit by the cost-of-living crisis. The market has expanded and so too have defaults, drawing the attention of financial regulators.

Changing times

“Currently BNPL is not a product that is subject to much regulation, but has recently attracted regulatory attention in a number of jurisdictions,” says Francesco Burelli, partner at Arkwright Consulting.

For example, last year the Reserve Bank of Australia introduced a no-surcharge rule. The US Consumer Financial Protection Bureau issued orders to five BNPL companies to collect information on risks and benefits, driven by concerns about accumulating debt, regulatory arbitrage and data harvesting “in a consumer credit market already quickly changing with technology”. In June, the UK government outlined plans to tighten BNPL rules that would require lenders to carry out credit checks on consumers to ensure they can afford to take out the loans.

Silvia Mensdorff-Pouilly, senior vice-president and head of banking and payments for Europe at technology provider FIS, says regulation is to be welcomed. “I believe regulation will be very similar to that for credit cards, focused on know-your-customer (KYC) requirements and credit worthiness,” she says.

Jamie Lee, head of partner management for Europe, the Middle East and Africa at digital payments infrastructure provider PPRO, says while talk about regulation may put BNPL providers on “high alert” in the short term, “the reality is that having standardised practices for BNPL will help providers, consumers and merchants in the long run”.

Consumers want more guidance around the credit extension practices associated with BNPL and the differences between providers, which will help them to make financially smart choices, he adds.

“By rolling out new standards for providers, regulators can ensure merchants can continue to see success with BNPL without incurring any fines or issues down the line,” he says. “In the end, just as with any new payment method, regulation might appear complex, but by taking on the challenges now, providers and merchants can ensure BNPL options are sustainable for consumer use in the future.”

Impact on providers

Mr Burelli believes regulation may have more of an impact on providers. “Overall regulation is, in general, looking at two main areas: enforcing transparency of charges and fees, and ensuring affordability checks are carried out as part of the loan application. All this will impact embedded BNPL value propositions at point of sale, adding friction to the checkout process, and adding a layer of compliance and reporting obligations to BNPL lenders. This will increase cost of operations, affecting, in particular, monoline providers that have, so far, not had to deal with regulatory compliance.”

Regulatory intervention is appropriate to protect consumers and, given the mounting credit losses of BNPL portfolios, lenders themselves, he adds.

Whether regulation encourages more banks to enter the BNPL market remains to be seen. Ms Mensdorff-Pouilly believes that, as with e-commerce, banks are late to the party with BNPL. “This is another big, new trend that has excited consumers that banks have missed out on. Banks are now finding it difficult to get on the bandwagon and it will be tough for them to get a foothold,” she says.

Rather, it is likely that banks will collaborate or co-brand with existing BNPL providers, leveraging their KYC and credit worthiness infrastructures to help BNPL providers in an evolving regulatory environment.

Mr Burelli says banks’ well-established compliance operations are likely to have a lower cost of funds than a monoline BNPL fintech new entrant. “For banks, BNPL offers the opportunity to attract new customers from the Gen Z and millennial generations that can then be converted into current account and other lending relationships. Despite the turn of the regulatory and funding tides, a number of banks has recently extended their offering to BNPL, including Santander and Commonwealth Bank of Australia.”

For Ms Mensdorff-Pouilly, the increased regulatory activity around BNPL is an important industry development. “I expect there will be a big clampdown on BNPL. Ultimately, this will be good for the industry as a whole, particularly given the seismic shift in the current economic outlook where the environment of zero or negative interest rates is being turned on its head,” she says.

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