By: Abhik Kar, Director Consulting, LTIMindtree

Buy Now Pay Later (BNPL) is a major disruption in alternative financing and e-commerce payments. It has rapidly become popular during the pandemic, which acted as a catalyst for this trend. BNPL has emerged as a digital lifestyle solution with rising merchant adoption. The latest report revealed a 10% CAGR growth in ecommerce in Western Europe boosting the market size to reach EUR 715 billion by 2026.

What’s fueling the surge in BNPL options?

This surge is because BNPL brings superior convenience to retail and small business borrowers, by providing immediate and flexible access to interest-free credit with just a click. In many cases, it is even available to those with poor credit history. Younger demographics such as millennials and Gen Z prefer digital payment options such as BNPL over traditional payment methods. In addition, retailers benefit as there is instant payment to merchants with real-time settlement, unlike credit card payments.

The role of the fintech:

As a result of the growing demand for this payment option, many fintechs entered the BNPL market to capitalize on this opportunity. Typically, BNPL is not an interest-bearing loan; it has been an unregulated space which gives rise to various challenges and risks for customers as well as lenders.

For instance, retailers attempting to provide BNPL convenience to their customers are partnering with these unregulated lenders. As a result, there is a risk to the customers and there is no monitoring of the process. BNPL needs to be a completely seamless experience to cater to customer expectations, but this is not always the case. In addition, there are often problems with returning an item and the subsequent refund, as the unregulated lenders in this space are not adept at handling them. Moreover, customers can easily rack up a lot of untraceable debt and then suffer the consequences down the line.

In this scenario, the risks associated with BNPL are often not well-balanced as financing is being handled by non-finance organizations.

Thus, there is a growing call for proper regulations, control, and monitoring to ensure consumer protection in all major markets worldwide – the US, UK, and Australia.

Why and how should BNPL evolve?

Research indicates that the global BNPL market will reach $3.98 trillion by 2030. Due to the growing potential of the BNPL market, fintechs entered this space, and challenger banks like Monzo, Revolut, and Curve have also planned to join the race in UK and Europe. To keep up with this exponential growth, the quality of BNPL services must improve.

It is vital to practice hygiene for better credit quality. At present, there is only a soft credit check. To protect consumers from debt that is beyond their means and to ensure a higher likelihood of payments, a mandatory credit-worthiness check is essential.

One possibility is the use of alternative data-based credit assessment by leveraging social media and contact center data. This provides insight even if the customer is underbanked or unbanked. It will reveal whether a customer is likely to be responsible and repay the amount or fall on the other end of the spectrum, resulting in non-payment. Harnessing this capability can be a differentiating factor and raise the bar on the quality of BNPL for all players in the ecosystem. Another differentiator is to bring a frictionless onboarding experience to customers at the POS. Also, the management of post-shopping activities must improve as there have been cases of unregulated BNPL players falling short in this aspect.

Regulators need insight into consumer debt arising from BNPL. At the moment, there is no way to track the relationship between debt accumulation and BNPL as this is an unregulated space. This insight will help regulators manage consumer debt and its impact on the economy.

Last but not least, rewards and loyalty management programs can provide a feel-good factor that wins customers over and combats competition from credit cards. This can be a significant differentiating factor when it comes to the long-term success of BNPL. In the future, it is quite likely that BNPL will replace credit cards to a large extent.

What is the impact of impending BNPL market regulation?

As regulators take notice and lay down the law in the BNPL space, it will leave a vacuum for compliant providers. There will be a need for digital solutions that enable seamless BNPL options and transactions at the point of sale (POS). Providing enticing consumer financing rewards will also differentiate players in this space. While fintechs have captured the majority of the BNPL market, banks have been moving into the space as well, and regulation will accelerate this shift.

Partnerships between banks and responsible technology providers are also likely. The latter will bring future proof-technological solutions to the BNPL space while banks are well-versed in compliance requirements.

Digital solutions that enable reporting will be essential to BNPL players. There will need to be periodic reporting of late payments or defaults in repayment to regulators.

Ultimately, stronger consumer protection will arise from regulating the BNPL space which is good for the long-term success of this sector.

Conclusion:

Proper checks and balances are inevitable in the long term as regulators have already started monitoring this space. Therefore, the above-mentioned factors must be carefully considered as new regulations are passed to provide better confidence to customers. This will also aid banks entering the BNPL space. Most importantly, it will ensure consumer protection, so BNPL is a secure and safe payment option that is offered at checkout.

LTIMindtree has partnered with Q2 and will be at the forefront of providing digital solutions to enable seamless BNPL options that adhere to regulations. We’re proud to be pioneers in this brave new world of financing options that will provide socially responsible credit options to all demographics and also drive greater revenue and market share for retailers and lenders.

References

The Disruptive Potential of Buy Now Pay Later in Western Europe – Euromonitor.com

Buy Now Pay Later Market Size, Share & Analysis | Forecast – 2030 (alliedmarketresearch.com)

Consolidation of the BNPL industry: what does it mean? – FinTech Futures

Affirm – Redefining Buy Now, Pay Later (gomedici.com)