• Michael Pierce, Commercial Director of Banking at FintechOS


• 15.06.2022 11:00 am
#BNPL

The innovation path of buy now, pay later (BNPL) has been forged by challengers originally outside the normal banking and lending world. As rapid mainstream adoption continues, the established financial services world has had to play catch-up, and this includes national regulators looking at BNPL’s meaning and reality.

Broadly, the question for the wider industry will centre around consumer welfare, affordability, and whether BNPL should be drawn into existing boundaries of consumer lending, such as overdrafts, personal loans, and credit cards, or if new and distinct regulation is required.

Inflation, and consequently, interest rates are on the rise The question remains: ‘how will this impact consumers and their purchasing power?’

In addition, regulators and providers will need to figure out where hard rules need to be applied, versus the lighter-touch guidelines and best-practice recommendations that regulators sometimes opt for when technology and services are new and unexplored, such as in open banking. There will be an eye to balancing compliance with maintaining a good degree of competitiveness and room for innovation in the industry.

Fortunately, regulators like the UK’s Financial Conduct Authority (FCA) have a good track record of rapid and well-thought-through regulatory reform and have pro-actively targeted the BNPL space for both industry consultation and direct intervention. In fact, in a response to the Woolard Review, the FCA agreed there “is a strong and pressing case to bring buy-now, pay-later business into regulation” and has recently collected viewpoints from consumer bodies and the financial services industry.

Questions around consumer welfare and fraud and compliance that could be of concern to regulators at the moment include poor credit ratings, dealing with late payments and the types of fraud risks consumers and businesses could be exposed to and if there are sufficient existing systems to protect everyone.

Will regulators toughen up on BNPL?

Up until now, the BNPL space has been dominated by small, upcoming fintech companies. These challenges have mostly slipped under the regulatory radar and managed to avoid significant scrutiny. Yet, things are about to change.

Growing concern regarding consumer debt and the related impact on the economy is drawing the attention of regulators. The FCA's work with the industry in the UK has, thus far, been positive and proactive. The body seems to regard BNPL as no more than an extension of existing elements such as store credit and deferred payment schemes.

However, BNPL providers can be assured that the space is no longer the 'Wild West' and that regulation will soon arrive. Perhaps counter-intuitively, the industry has welcomed regulation with the attitude that they have nothing to hide.

Still, regulators will be on the lookout for any kind of 'abuse' of consumers. Regulation will focus on provider risk and compliance in integrating BNPL debt into standard models. As such, the most transparency and clarity that BNPL providers can offer in their lending solutions, the better.

BNPL credit checks will soon be consolidated into traditional credit scoring, and be subject to the same standards of consumer rights and data protection. Going forward, PSD2 adoption will give consumers greater access to their own data, so scrutiny will also come from customers, as well as regulators.

Globally, there will still be unregulated BNPL markets for some time to come, but history shows international markets often follow the UK's example. So, is the party over for BNPL providers?

Should legacy banks be wary of BNPL?

BNPL may be facing closer scrutiny, but it's still the future of retail lending. BNPL is a touchstone for a new wave of consumer behaviour.

Financial services will soon become a more experiential market. Banks and lenders will need to offer faster, more-agile services like BNPL to stay relevant, and around 50% of all institutions will be active in the market in the next three years.

With all providers entering this market, the pressure is on the differentiate offerings from those of your competitors, and that pressure will increase on a near-monthly basis going forwards. 'Wait and see' remains a viable option for established lenders, but they must be sure this is a deliberate choice and not hesitation or ignorance.

Final thoughts: how established banks and lenders can move ahead with BNPL

A focus on fairness for customers and clarity in customer experience (CX) is the first and foremost consideration in any BNPL application. Organisations should reflect on the careful and transparent design of product criteria, which should not just be limited to the lending product itself, but also include how pre- and post-sales filters and monitoring can be applied automatically to improve personalization and credit-risk management.

In both these points, experienced lenders are in a good position because they already design products that are fair, responsible, and regulated. Additionally, established financial institutions have a legacy of trust and stability that cannot be replicated by market challengers. This legacy actually makes them the perfect BNPL providers to a significant portion of the population.

According to a consumer report, the BNPL Wayfinder, “people are significantly in favour of bank-provided BNPL… 54% of people more likely to choose a BNPL option if it’s provided by a bank, with 34% being neutral and only 12% saying a bank brand on a BNPL offer would preclude them from choosing it”. As with any other area of financial product innovation for established financial institutions, the key is the ability to involve a multi-disciplinary team and collaborate around a single platform covering products, web and app content, business logic, customer journeys, customer services, and reporting. This means the inclusion of software experts, as well as designers, CX specialists, customer services, product managers, compliance, and growth teams.