LENDING: BUY NOW,, PAY LATER
THE BIG BNPL DEBATE James Bryce-Lind of credit scoring platform Credit Kudos, Simon Westcott, from PwC and Laurel Wolfe, of banking-as-a-service provider Mambu, discuss the risks and opportunities in the BNPL sector – its phenomenal rise in popularity and where both it and the banks go next There’s no denying the success of BNPL (buy now, pay later) in recent years. The biggest providers – Klarna, Afterpay, Affirm and others – represent a new wave of digital lenders that banks and retailers are still unsure whether to treat as lovers or rivals. And yet they were barely even aware of BNPL’s presence back in 2016. In that year, the new wave of alternative lenders collectively gobbled up only one per cent of the entire UK credit market. Fast-forward a few years and credit card transaction volumes fell 31 per cent between January 2020 and January 2021. And, while some of that could be explained by lockdown, at the same time, BNPL transactions quadrupled to nearly £3billion. This explosive growth means BNPL is under increasing pressure from regulators and consumer groups, concerned that this particular form of easy-access credit has – in the UK Financial Conduct Authority’s words – a ‘significant potential for consumer harm’,. Meanwhile, other financial services have begun launching ‘me-too’ products. PayPal introduced its own version of BNPL in August 2020; neobanks Monzo and Curve launched their products, both named Flex and, both curiously, on the same day, in September 2021. Virgin and Barclays are taking an interest – the latter teaming up with Amazon to allow Amazon customers to spread the cost of certain purchases of £100 or more over equal instalments.
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The encroachment doesn’t appear to bother the BNPL brigade, who continue to diversify their offerings. One of the most artful is Klarna, which has stayed ahead of the game, changing its colours, confusing BNPL predators and appeasing regulators. Most recently, it launched its own version of a credit card and almost simultaneously aimed to avoid restraint in the UK by getting rid of late payment fees and offering an option to pay off in one go. As with others in this category, Klarna occupies a unique niche – somewhere between the retailer and the bank, posing a potential threat to both by disintermediating the relationship with consumers on the one hand and merchants on the other. So, what should banks, and acquirer banks in particular, make of it all? James Bryce-Lind of the open banking-powered ‘fair credit’ scoring platform Credit Kudos, believes the BNPL category is, first and foremost, a triumph of marketing, but it neverthelesss leaves banks in a quandary. “It’s such a loud space,” he says, “when, if you look at the US, for example, BNPL actually only makes up a small portion of overall spending: $100billion in 2021, compared to roughly $8trillion on payment cards.
For all the financial institutions that are current-account-first, it begs the question whether BNPL should be a feature or a product James Bryce-Lind, Credit Kudos
“For all financial institutions that are current-account-first, it begs the question whether BNPL should be a feature or a product. There’s been an ongoing debate around that, but if you look at the constructs of the first-generation neobanks – your Revoluts, Monzos, Starlings – the ability to monetise that customer base from a current account relies on how many products you can sell them. With BNPL operators, what we’re seeing is that, by
offering a value-added product first, like Klarna or Afterpay have done, they’re building meaningful relationships with customers. They’re then able to cross-sell into other aspects of financial life, whether that’s a longer-term product, or offering a personal financial management tool, which Afterpay launched recently in Australia. It’s flipped the concept of a neobank on its head.” Laurel Wolfe of Mambu believes that for banks imitating BNPL, ‘it’s more about keeping the customer in their ecosystem’ and dissuading them from using other payment options from other providers. “I don’t imagine they’re spending too much time thinking about the monetisation of it; rather, it’s a relationship issue,” she says. From a consumer perspective, though, one of the attractions of BNPL, is that their relationship with the provider is short-lived. “And that’s exactly the difference,” says Wolfe. “In a BNPL offering, you use it at the time you need it, once, and you have a relationship around that transaction with the BNPL provider until you pay it off. You don’t have to have a relationship with them again, if you don’t want to. It’s completely your choice. With other credit providers, you do have an ongoing relationship, with all of the entanglements that may mean.” 'Entanglement’, of course, includes long-term contracts, interest, late payment or monthly fees, as well as potential impact on a consumer’s credit score. As Wolfe points out, BNPL operators, in any case, make the majority of their money from merchant transaction fees. “ People often lose sight of that fact,” she says. But it’s particularly relevant in the current debate around consumer debt. With a BNPL user’s upper spending limit ‘pretty restricted’, according to Wolfe, there’s less chance of running up unmanageable borrowing – unless, of course, customers use a multitude of providers, for which, at present, there is no regulatory disincentive. PwC’s Simon Westcott says the difference between BNPL and traditional credit providers ‘becomes quite stark when you start to look at the different economic models underpinning each product’. ffnews.com
