Every month, fintech analyst Philippe Benon explores a new topic and assesses the “state of the art”, providing in-depth analysis and understanding of the market landscape.

This month we take an in-depth look buy now, pay later (BNPL).

BNPL has become one of the most controversial credit products of the modern era.

For some, it’s the future of more fair, affordable, and transparent credit, while others claim it’s the next “payday loan” crisis pending. In truth, it’s probably somewhere in between, and a topic I’ve been wanting to explore in depth for a while.

Store financing reinvented

Buying something today and paying it back later is not a new concept. Walk into any furniture or bed shop and you’ll be hard pressed to have the 0% finance signs waved in your face, aiming to persuade you that the £2,500 price tag isn’t why you should walk out of the store empty-handed. Installment plans have always made sense for large purchases, but the popularity of store cards in the 1990s made it possible to pay for small transactions on credit as well.

Store cards fell out of favor with the rise of e-commerce, but the appetite for credit remained as consumers turned to credit cards or alternative providers such as payday loans. Following criticism, new regulations and pay scandals which saw many UK breakdown service providers either banned from operating or forced into administration, BNPL began to gain prominence.

BNPL, in essence, is a win for all parties. It increases customer conversion for the merchant and is often much cheaper for consumers than traditional credit cards while providing more flexibility to repay. However, it has drawn criticism over users going into debt and not reporting information to credit agencies, despite Klarna now doing so since June 2022.

Old habits die hard

The Covid-19 pandemic has boosted high-growth tech companies and has seen Klarna become Europe’s most valuable fintech with over $45 billion in June 2021, while Australian provider Afterpay was acquired by Block ( then Square) for $29 billion in August 2021, which was the biggest. takeover in Australian history. BNPL has benefited enormously from the exponential growth online. Consumers have found it more convenient to pay, and especially at uncertain times, it is beneficial for users to spread payments into affordable installments without incurring late fees or interest.

However, hope that this forced shift to e-commerce would become a permanent legacy of the pandemic has not materialized. As the world began to look like “normal” in 2022, consumers largely reverted to old habits and pandemic winners like Ocado, Zoom and Peloton began to suffer, and then so did the fintech industry. At the start of the pandemic, e-commerce accounted for 30% of total retail spending in the UK and peaked at 38% in January 2021, but in June 2022 it was below 25%. This took the e-commerce industry by surprise and caused massive layoffs, including BNPL suppliers.

Source: Office of National Statistics

Innovate now, regulate later

Such is the nature of product innovation, it must gain momentum before the regulator begins to notice. The pandemic has provided the perfect storm for BNPL, with brick-and-mortar stores closed and bored consumers turning online to get their shopping ‘fix’ and BNPL reducing friction by enabling ‘instant gratification’ and delaying the idea to pay until the first installment is due.

However, BNPL has only been a mainstream product for 5-10 years, so it has not experienced a major economic decline, which will be a test for the resilience of the business model. You imagine there will be more demand for BNPL in a cost of living crisis, but lending is riskier. The BNPL is also subject to increasing fraud attempts, so identity checks must evolve rapidly.

Can BNPL’s suppliers afford to run the risk of late payments? Cash is king, and having a strong balance sheet and a cash trail is the only way to navigate uncertain times, which is why I think people like Klarna are willing to accept additional investments on terms of evaluation also reduced.

This has prompted regulators, particularly in Australia, the UK and the US, to watch BNPL very carefully, with regulation to include tighter accessibility controls, data protection and standardization, which will make ultimately more difficult for BNPL suppliers to market their products to consumers.

Race down

Increased competition is recognition that this is a solid product. I don’t think anyone can disagree that flexible credit with no interest or late fees is a bad thing for the consumer and it’s a very effective customer acquisition tool. However, it looks like a “race to the bottom” for traditional BNPL providers when it comes to getting your payment button on the merchant site. Increasingly, merchants will be able to play BNPL suppliers against each other and negotiate cheaper rates or incentivize offers for an exclusive contract (this is very much Affirm’s strategy in the US having signed an exclusive contract with Amazon until 2023).

Competition for BNPL is appearing from all corners. Incumbent banks, neobanks, and big tech have all launched their own version of BNPL. Apple’s game is particularly notable because they don’t need to integrate directly with merchants, and coupled with their in-store POS terminal game, they have the ability to control the entire value and incentivize users and merchants. I wouldn’t be surprised to see regulators keep a close eye on potential anti-competition issues.

The reasoning of banks launching a BNPL product is misinterpreted. Banks are expected to lose credit card revenue due to BNPL’s success, when in fact it is their overdraft business. Charges on “unauthorized overdrafts” were banned in April 2020, which boosted BNPL as consumers saw it as a more viable and affordable alternative that would save them from dipping into their overdrafts.

BNPL 2.0: save now, pay later

From 2023, the UK government will bring into force legislation which will ensure that BNPL lenders will be required to carry out affordability checks to ensure loans are affordable for consumers, as well as changing the rules of financial promotion to ensure that BNPL’s advertisements are fair, clear and not misleading. BNPL lenders will also need to be approved by the Financial Conduct Authority (FCA), removing exemptions that previously applied to interest-free products.

Advance BNPL 2.0. It was a hot topic at the recent Money 20/20 Europe conference where panelists Alice Tapper (Financial Inclusion Advocate), Ruth Spratt (Zip) and Clare Gambardella (Zopa) agreed that we are now at the point where BNPL 2.0 is needed, saying “it needs to be more structured, regulated and easier to manage”. It was also noted in the panel that “information disclosure needs to be improved at the point of sale, you can’t expect consumers to improve their financial well-being without it.”

Zilch, a BNPL provider founded in 2018, sees itself as part of the BNPL 2.0 evolution with communications director Ryan Mendy commenting that the company is already FCA regulated and its strategy is different from traditional BNPL providers. He says: “We focus on a direct relationship with the consumer rather than a limited group of merchants, we offer 2% cash back for consumers who ‘pay in 1’ and 0% interest for those who ‘pay in 4”, we are seeing daily usage, and we perform real-time behavioral data analysis to continuously assess accessibility through a customer’s borrowing and repayment activity and revise their credit limits customized accordingly.

BNPL 2.0 is an easy rotation for me if it pivots to “save now, pay later”, which is a term I first observed in Fintech Brainfood in January. As we’re in the midst of a cost of living crisis, saving on a specific product makes perfect sense, and especially if you’re able to get a merchant discount, as is the case with the retail business model. ‘Increase Savings. Up Bank in Australia has also launched a new savings-based feature that encourages customers to save upfront for purchases rather than paying them back. The new service means customers can now create automated savings plans for items in their online shopping cart – dubbed a “Maybuy”. Once the savings goal is reached, they will have the option to purchase the item or reconsider and keep the money they have set aside for something else.

BNPL will not suffer the same fate as payday loans simply because the fees are not so exorbitant. The popularity of BNPL has raised questions about traditional credit scoring models, which can only be a positive element that will ensure that credit is more available and ultimately more affordable. Banks and fintech providers have been slowly moving away from “financial management” toward “financial wellness,” and “Save Now, Pay Later” is the perfect compensation product to incentivize consumers. After more than a decade of historically low interest rates and cheap debt, BNPL must evolve to BNPL 2.0 to ensure its relevance for the next decade.

About the Author

Philip Benton is a senior fintech analyst at Omdia and writes analysis on the issues driving technological change in financial services. Prior to Omdia, he led consumer trends research in retail and payments at strategic market research firm Euromonitor.

In this column, Philip will discuss the technological implications and consumer expectations of the latest fintech trends.

You can find more of Philip’s views on fintech via LinkedIn or follow him on Twitter @bentonfintech.

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