These days, the term Buy Now, Pay Later (BNPL) is everywhere. Key industry pioneers like Klarna and Affirm are seeing record transaction numbers, new players are popping up every month, and the industries that the BNPL providers serve are growing in ways no fintech experts ever thought possible (vet care, rent relief, utility bills). But what does that rapid growth mean for the future of BNPL? What about the increased regulations that are looming on the horizon? Here, we’ll look at a brief history of BNPL, what the current state of the industry is like, and hear from industry influencers on what they think the future holds for BNPL providers and consumers alike.
While it’s easy to think that BNPL is a 21st century phenomenon, technically the movement started as soon as personal credit became a thing. Postindustrial revolution consumers wanted to buy larger-ticket items that were just out of financial reach – farmers needed farm equipment, housewives wanted sewing machines, etc. And the era of installment plans and new credit practices were born1. Of course, these days the BNPL landscape has virtually exploded – with providers offering everything from high-end fashion and electronics to payment plans for health care and rent relief. Industry
giants like Klarna, Affirm, Quadpay and Afterpay (along with plenty of smaller regional and niche BNPL providers) generated $20 - $25 billion in purchases in 2020, with experts saying
the industry will “grow as much as 15 times its current volume by 2025.”
Offering consumers point-of-sale installment plans with no (or soft) credit checks, and zero percent interest rates is appealing to certain people (often younger consumers) who don’t want to be tied to an interest-accruing credit card. When the Covid-19 pandemic ravaged the globe, BNPL continued to boom, for a couple of key reasons. With so many people stuck at home, online shopping was never more accessible – not just for shoes and gadgets, but for things like groceries, cleaning supplies and personal protective equipment like gloves and masks. Additionally, for a number of people worldwide out of work (and cash), purchasing items with a payment plan and little to no interest was extremely appealing.
So where do we go from here? With talks of increased legislations and regulatory oversight, what does the future hold for BNPL providers and the consumers who love their services so much? We sat down with some industry experts to see what they think the future landscape looks like.
Fintech Business Weekly
Jason Mikula, a fintech industry consultant, publishes the newsletter Fintech Business Weekly, which offers in-depth analysis on trends and stories in banking, fintech and regtech. A former VP at Goldman Sachs, Jason has experience in digital banking, consulting and fintech products.
The BNPL and POS lending landscape is evolving rapidly -- in terms of product designs, companies operating in the space, and regulatory environment. Australia and the UK have already seen regulatory interest in the product category pick up, particularly as it relates to the affordability question / assessing a user’s ability to repay the debt. While US regulation often lags behind other countries due to its fragmented nature, I expect increased scrutiny from US state and federal regulators, particularly as it relates to affordability checks and consumer disclosures for BNPL products. The primary benefit for merchants [currently] is positioned as higher conversion rates and higher average order values; the cost to merchants is a significantly higher merchant discount rate vs. the credit or debit cards consumers would otherwise use. For users of BNPL, the benefit is spreading payments out, often at no additional cost (i.e. no fees / 0% APR financing). This makes larger purchases feel less painful, thus boosting merchants’ conversion rates.
At this point, it’s unclear how regulators will interact with the evolving BNPL providers / products. Regulators could examine providers through existing frameworks -- like UDAAP, FDCPA, TILA, etc. -- or embark on rulemaking
specifically aimed at the sector. If the UK and Australia are predictive, the top regulatory issue may be around ensuring BNPL users are not becoming over indebted by using the product.
The BNPL space has become incredibly crowded, seemingly overnight, and there’s presently a “land grab” for merchant partnerships taking place. Securing key partnerships, preferably with platforms that come with scale (i.e. Shopify), preferably on an exclusive basis, is key to building a defensible business model in BNPL. A key roadblock for providers is distribution (i.e. merchant partners). Choice of BNPL provider tends to be convenience-driven at the time of checkout. Users don’t necessarily have loyalty to a specific BNPL provider. To tackle this problem, BNPL have introduced their own shopping apps and physical payment cards, but it’s unclear if these product extensions are gaining traction with consumers.
The most obvious impact from COVID-19 is indirect, and that is the huge spike in e-commerce activity vs. bricks and mortar. While a BNPL offering is possible at physical point-of-sale, the experience is likely to be significantly less elegant than in an e-commerce checkout flow. A secondary trend during COVID has been consumer de-leveraging; i.e. paying down debt. To the extent that users don’t think of BNPL as debt (vs. traditional credit card), the product category has stood to gain from this de-leveraging.
Whether offering a “split pay” product or a longer-term loan, these are forms of debt a consumer is taking on (even if a specific product configuration avoids legal categorization as credit). For providers, credit risk (i.e. default / non-payment) is always a risk, especially in the rapidly evolving economic climate we’re presently in. Regulatory risk is also a real threat to provider business models. For consumers, the primary risk is taking on more debt
than they can comfortably handle, especially as some BNPL providers don’t use traditional underwriting techniques.
This means a lender having access to data on an applicant’s existing debt payments (if any), monthly outgoings that wouldn’t show up on a credit bureau (rent, food, transportation, etc.) and verifiable income. While APR is an important tool to price and compare credit, a typical consumer is more likely to focus on the size of a monthly payment vs. their disposable income in evaluating if a loan feels affordable or not.
Capital Benchmark Partners
Helen Ngo, a CFP® and former stockbroker, now runs her own investment management and financial planning firm, dedicated to working with individuals to help them make wise financial decisions. Her expertise includes personal financial planning, investing and healthy consumer behaviour.
In speaking about the future of the buy now, pay later landscape, Helen commented that “the space is going to continue to boom. These types of payment plans will only grow in attractiveness to both providers and
consumers. I anticipate that they will continue to expand to additional, adjacent industries, and the variety of providers will see steady growth. However, regulations are imminent –
Helen feels there are certain strong benefits to BNPL, namely that these types of installment plans offer “great options for larger purchases, particularly where cash flow may be an issue, for example someone who receives a yearly bonus. This type of flexibility is great for consumers who need or want to purchase something ahead of their anticipated influx of cash and helps to encourage a healthy economy.”
Helen adds “Covid-19 has had quite an impact on the BNPL space – initially there was a huge boom with BNPL; thanks in part to many consumers shopping online and those who wanted to defer payments because of income struggles. However, there can be a false sense of affordability with installment-type payment plans, and many industries still haven’t bounced back. Providers will feel the longer-term effects of this as there will be some consumers who will simply be unable to repay. This is where some of the increased regulations will help – they will protect consumers and better provide more transparency on affordability, in turn also helping to protect the lenders. Better checks and balances, more in line with the regulations around credit card products, will help protect consumers and encourage responsible spending, but also protect providers to ensure they are offering credit in a less risky way. One necessary factor in helping to regulate the industry going forward is some consistency in pricing transparency – redesigning the sales process to ensure both providers and consumers are aware of actual pricing and affordability.”
Coherent Market Insights
Raj Shah is a seasoned strategy professional and business accelerator with global experience, from strategy to on-the-ground operational improvements. With a focus on digital aspects/fintech, he founded a management consulting company, Coherent Market Insights, and has been covered by CEO Today Magazine, Forbes International, HuffPost, BBC.com, CBS news, CNN and more.
Currently, the buy now, pay later industry is around $24 Billion USD, and is expected to disrupt the consumer credit industry. With the global ecommerce market to reach beyond $1 trillion USD by 2025, BNPL is expected to witness around 8% of the total transactions (by this period). We are yet to account for the offline retail transactions at point of sale at retail locations. Summing up, it demonstrates that the future of BNPL is very promising. As a part of the ecosystem, it would not be surprising to see traditional banks (with millions of account holders), credit card issuers, payment networks and large retailers with their own BNPL platforms, which would give them an additional revenue stream and would help them to capitalize on the trend of the growing consumer credit market. As banks have been considered a trusted source of lending, entry of banks in the space would give customers a trusted tool to manage their finances, instead of adding another lender. We would see consolidation in the industry, with banks, payment networks, and large merchants either investing in BNPL
If I were to launch a BNPL provider somewhere down the line, I would want to disrupt the healthcare industry, by introducing the BNPL method for cashless healthcare services, particularly for countries with non-healthcare policy holders like India. Imagine a patient who doesn’t have a health insurance policy walks in with ailments, and the private hospital treats that patient with a value proposition and focus on offering services, as the charges are already paid by BNPL service provider on behalf of the patient. The launch of BNPL platforms in the healthcare industry would not jeopardize the treatment provided by healthcare institution, would ease the payment burden on the patient, and would enable that patient to pay in installments over a period of time.
Consumers spent around $850 Billion USD online with U.S. retailers in 2020, compared to $610 Billion USD in 2019 (as per Coherent Market Insights’ analysis). The traction in online shopping resulted in an additional $174.87 Billion USD in ecommerce revenue in 2020. As the Covid-19 pandemic disrupted the world, it changed the mindset of consumers to focus more on shopping online, and in higher frequency. Amazon, naturally, has also benefited from the shift to digital with its recent record quarterly profit and 40% sales growth. As per the recent survey of Coherent Market Insights, around 3% of the ecommerce transactions in the U.S. were executed though BNPL platforms, with majority of those consumers explaining that the platforms helped them in planning their budget and finances during financial insecurity and job cuts.
This has created a positive outlook towards the BNPL industry and will continue to bolster the potential growth in terms of number of users and total value of the industry even after the market recovers from the effects of Covid-19.
BNPL platforms are in fact products for budget-averse customers who can improve their cash-flow with no added cost. Almost all of the leading platforms in the market including Klarna, LazyBuy, ClearPay, PayPal Credit, Affirm, Afterpay and Quadpay are transparent with the cost associated with the late fee (in case of default of the payment after predefined period). Although players like Bread, PayPal Credit and Affirm charge interest, the capped interest rates/payments are mentioned transparently to the users and are way often easier to manage than the cumulative interest payment system adopted by credit card providers. Most of the players, except a few such as Simpl (in India) report the data of defaulters to the respective regularity authority of the government in that nation, hampering the credit score of the user. Although this seems to be no different than credit card issuers, credit cards work to improve credit scores with purchases and transactions, where most BNPL products do not. Regulatory bodies should accept the data of BNPL players in order to improve the credit health of its users.
Additionally, integration of features like credit monitoring, rewards programs, personal spending reports, exclusive deals and notifications of new product ‘drops’ from brands would enable lenders to create products that enhance consumer credit health. Most of the BNPL platforms are easy to use and tend to make it easy for consumers to spend more than they can afford, which is a fear of regulators. As of now, the regulators are tracking the movements of BNPL players and are assuming that such schemes could result in overstretched finances and cause potential financial distress. To date, the compliance regulations are very weak; thus it is essential to include the BNPL industry under the banking and financial institutions norms and compliances, which can enable the regulatory bodies to keep track of the health of credit industry for consumers, and the credit industry of particular regions.
I believe transparency and awareness in the usage terms, and clear acknowledgment (with better visibility) from the users should be
mandatory, which would decrease the rate of impulsive buying from users. Advertisement for these products should be mandated to include terms and possible interest/late fees structure, showcasing examples of defaulters to increase the awareness of the products. This is similar to the advertisements of bonds, equities, and tobacco products as well. Regulations are also essential on the use of celebrity endorsements, and the way they are promoting buy now, pay later companies. Endorsement of a financial product should be mandated by stringent guidelines from regulators to prevent incorrect influences on the audience or potential users, as endorsing a fashion brand or FMCG product is enormously different from a financial product.
Regulations to protect the rights of consumers are also important and much needed, but they are currently absent in the BNPL industry. Under federal law in the United States, a customer has chargeback rights with credit card purchases. This gives customers power to get it reimbursed, in case of defective products or not one as advertised. As of now, few of the BNPL players are checking the credit history of a consumer, nor sharing the credit history of their database to the respective regulators. Thus, it is of supreme importance to have the data of the entire circular loop shared with the financial authorities of the respective countries. BNPL players should be going beyond their existing business policies to be compliant in accordance with the banking system or credit card issuers. Instead of only sharing the defaulters’ history to the financial authorities (as most of the leading players do), which impacts the credit score of the user, it is also important to link the purchase history and on-time payments by the BNPL players, which would positively improve the credit score of the user, as in the case of banking transactions and credit cards.
Lendit Fintech
Todd Anderson is the Chief Product Officer at LendIt Fintech, the largest media and events company dedicated to innovation in lending and digital banking.
When it comes to the future of buy now, pay later, Todd feels the industry will become “a threat to the credit card. While it won’t eliminate the credit card entirely, it will change how the credit card industry operates and will reshape the small-dollar purchase industry.” The Covid-19 pandemic has also had a significant effect globally on BNPL, “accelerating the space immensely in the last 18 months. It was previously a burgeoning market but now it has really changed how consumers think of credit, and credit cards.”
There are lots of benefits to BNPL plans – namely access to credit, “especially for small purchases. It allows someone to get items that they deem necessary even if they do not have the full amount of cash to buy it at the time of purchase.” But as the industry is rapidly growing and evolving, there are certain things that could or should be implemented, namely reporting BNPL loans to credit bureaus so borrowers can actually build credit. As a credit option that is quickly becoming a must have, in the future, BNPL should become a component for all providers. Consumers will need to be careful not to overuse BNPL plans, but it will remain a great option to break up payments over a period of time instead of needing a larger amount upfront or using traditional credit with double-digit interest attached. “I think it is
the next phase of lending, especially for younger generations who may have a negative feeling towards credit card companies and banks. It also helps those who are living paycheck to paycheck; you do not need to be approved for a credit card and so long as you make payments a lot of providers will not do credit checks on small ticket items. It can really help build responsible credit behavior.”
Currently, there are risks to both providers and consumers with BNPL. “How much is too much when it comes to the number of BNPL loans? Consumers can continue to make purchases this way but eventually there will be too many loans for one person to remember to pay. Some guardrails will need to be created, most likely after some issues arise.” But as Todd points out, a good safeguard today is that most providers no longer lend when someone misses a payment, helping to ensure the consumer doesn’t take on added debt and protecting the provider from risky lending. “The UK has adopted some rules around ability to repay; you will start seeing more regulatory pressure once borrowers get in over their heads with too many loans, although most of these are not big ticket items so thankfully I do not see the same issue as a maxed out credit card.” But as the space continues to evolve and more providers are offering BNPL options for bigger-ticket items like travel and healthcare, that could change. It’s clear that regulations are imminent – although there are some regions that are a bit further ahead (like the UK), “regulations, so long as they are not overly aggressive, should help to set healthy boundaries for the industry. If regulators go overboard it could really depress what has become one of the hottest and most promising segments of fintech.” Going forward,
Finsiders
Danylo Martins is a Brazil-based journalist with over a decade of experience covering finance, entrepreneurship and innovation in the financial sector. With an MBA in capital markets, he has won four economic journalism awards and is currently the founder and editor-in-chief of Finsiders, a leading publication focused on the Brazilian fintech ecosystem.
Part of the beauty of buy now, pay later is that it provides an opportunity for true innovation. As Danylo says, “I have increasingly seen financial institutions (including banks, fintechs or even new entrants from sectors such as retailers, telecom and others creating their own financial arms) developing new products that go far beyond the traditional ones in the market (like overdraft, credit cards, personal loans). I think there is a combination of factors for the emergence of new products. For one,
The advancement of new credit risk assessment and modeling technologies is influencing the landscape. And regulatory movements, which will gain even more strength this year with Open Banking, are drifting to more of an Open Finance model. In short, with more robust technology and more access to data, institutions have a valuable asset with which to build new credit products for consumers, whether individuals or small and medium-sized companies. The access to more and better data is not only what matters, but what is done with that data. How is data interpreted and used? What are the insights from this information? What can you build based on this data?” The opportunities for innovation are endless.
BNPL products and providers are fairly recent in Latin America, particularly in Brazil – despite consumers in the region having utilized installment plans for quite some time. “This wave of BNPL Is something recent. There are some fintechs here exploring this trend, but like every new market, there is a learning curve and gradually consumers and even institutions are learning what works and what doesn’t.” Danylo believes the concept has growth potential in Latin America, referring back to the way the consumer needs and the financial landscape in the region are evolving rapidly. “The consumer has changed, and data-intensive use helps build new credit solutions. There is definitely potential for expansion in Latin America, especially in Brazil, but also in Mexico and Colombia, given the high number of underbanked individuals, or worse, those without any access at all to financial services.”
Given that BNPL often uses soft-credit checks, and doesn’t rely on traditional credit scores, it’s a way to help serve those underbanked/unbanked consumers more easily and promote more financial inclusion.
“According to data from consultancy CB Insights, the global BNPL industry will likely grow 10-15 times its current volume, reaching something like $1 trillion USD in volume per year by 2025. Stats like these indicate that BNPL has huge potential in developed markets, as it was not a method of payment easily available until recently, unlike Brazil where we have been living with purchases in installments for a long time now.” The rapid growth of BNPL companies like AfterPay in the U.S. or Klarna in Sweden are understandable,
given that they serve a very specific need that was previously unattainable. So what makes countries like Brazil so different? Again, despite the fact that Brazil for example has consumers who have frequently paid in installments, BNPL is still a very young industry and there is room for incredible innovation and growth in Latin America, in all sorts of markets.
The impact of Covid-19 on the financial sector as a whole was, and continues to be, significant, and “the credit market was no different. Large banks and fintechs needed to adjust their risk assessment models, given the uncertainty regarding the progress of the pandemic. These scenarios of uncertainty and lack of prospects for the future certainly impacted credit products globally. In Brazil, we are used to dealing with volatility and unpredictable events, but here another critical ingredient has been added: public health and social risks.” E-commerce, already a growing trend prior to the pandemic, accelerated even more rapidly in regions hard hit by Covid-19 – with social distancing, people were forced to resort more to delivery and online shopping, which of course, requires new, innovative forms of payment options.
El Financiero Mexico
Based in Mexico, Jeanette Leyva is a journalist with over 15 years of experience covering financial, economic, technological and cybersecurity issues. Currently working with El Financiero in Mexico, a newspaper focused on the economy, markets and business, Jeanette has previously won a José Pagés Llergo National Journalism Award.
Apart from being an exploding market, Buy Now, Pay Later products offer consumers unprecedented access to purchases they may not have been able to make before. But how can lenders help ensure that their products support healthy growth of their business and long-term consumer credit health?
Jeanette says “the credit health of financial services clients must be taken care of from the first moment a financial product is granted. Consumers need financial products that are not only simple to explain and understand, but providers must do their part to encourage informed, financially educated consumers from all demographics.
since it allows them to understand not only the product, but their financial situation, how much to borrow, which providers/financial organizations and products suit them best.” This applies not only to BNPL providers, but credit
lenders at large – particularly when dealing with individuals who may not have had many opportunities for financial education previously (i.e. younger consumers, the underbanked/unbanked population).
Jeanette sees that BNPL is part of the larger economic process of “evolution and revolution, since not only are there more and more options in the market,” but there are also far more than just traditional credit scores at play here. New types of alternative data are “used to evaluate who is given credit, from artificial intelligence to social networks, which allows more people to have access to this type of financing.” This evolution in lending and the ways credit decisions are made, means that in the future other types of financial lenders can also adopt these processes – enabling a whole new world of loan approvals and credit products.
And while there was significant impact economically from the Covid-19 pandemic, and a massive uptick in the use of BNPL products as a result, Jeanette doesn’t think that spike in usage is temporary. “In the future, all of the elements that make BNPL products so appealing are still valid. With rapid advancements in technology and risk models and the type of data used to make credit decisions, BNPL providers have an opportunity to make a real positive impact on the ways in which credit is granted.” The future possibilities are endless, “including more personalized products with differentiated interest rates based on consumer profiles,” and expanded market offerings within the BNPL space. Bottom line? As Jeanette says, “Buy Now, Pay Later is here to stay. The opportunity is there for the industry to evolve and adapt quickly to benefit both providers and consumers.” A journalist first, Jeanette adds “It’s a story to be followed.” And we couldn’t agree more.
It’s clear that the BNPL industry is moving quickly – there are new providers launching new products what feels like daily. More and more consumers are choosing to partake in BNPL plans. Regulation discussions are frequent and evolving rapidly. While the future of BNPL regulations and what exactly the industry holds may be difficult to pin down (can we say moving target?), one thing is crystal clear. There is certainly no end in sight to the opportunities the industry affords – for payment providers, merchants and consumers.
So, what comes next? If you’re planning to compete in the BNPL space, there are certain things you can and should do to future-proof your solution:
• To find out more about how to choose the right solution to help you prepare for the future of BNPL, and to discover how Provenir’s risk decisioning ecosystem can help, download our latest eBook: Back to the Future: The 8 Features of a Fast and Future-Proof BNPL Technology Solution. Get the eBook
