Buy now pay later (BNPL) has become a global phenomenon. The global BNPL market size was valued at USD 15.91 billion in 2020 with growth to 90.51 billion by 2029 (source 1). If BNPL isn’t in your market today, it will likely be soon. Look at any major country and you can see or read about BNPL developments. It has reached all aspects of purchasing from day-to-day retail purchases to vertical specific payments solutions. BNPL for legal services anyone?
Should we expect indefinite expansion of such a rising star? While BNPL holds great promise, I think four key issues need to be addressed for us to see sustained BNPL success.
|A primer on BNPL|
We have seen BNPL before – remember installments? Installments provided an option for those who couldn’t pay in full or for those who may benefit from delaying payment. This is true of BNPL as well, though BNPL has brought installments into the 21st century, offering feature-rich, consumer friendly solutions to grab attention. Want more on the foundations of BNPL? See our module series below.
Improved consumer understanding of repayment obligations
Of course, BNPL purchases may help fulfill basic needs during difficult times. But repayment is inevitably required.
An avid BNPL user of a single solution may find many transactions within the app noting each repayment plan with corresponding dates and amounts. Transactions in a BNPL app are not combined in any way (at least not yet), and each has an individual due date. Tracking, planning, and delivering on repayment obligations can be difficult, even more so for a consumer that uses more than one BNPL solution.
Moreover, some solutions have late fees which can occasionally add up to more than the purchase amount. Continued use of BNPL may send some consumers into a deep debt spiral putting future savings at risk.
We need more and better consumer education for BNPL to continue to grow rapidly.
Better fraud mitigation and management
BNPL data is rich with information about consumer buying preferences, buying habits, merchant preferences, etc. BNPL providers often require sellers to pass line-item data to providers in order to make a better credit underwriting decision. This data offers opportunities to providers. But it also is a honeypot for fraudsters who are increasingly using BNPL as a gateway to fraud schemes like account takeover and identity theft.
We need BNPL risks and related fraud schemes to be better understood, monitored, and managed for BNPL to thrive.
Sustainable business models
Though business models vary considerably, BNPL providers often bear the risk with purchases that aren’t repaid. Their business models recognize this and assume a certain percentage of risky and unpaid purchases.
In good economic times, most consumers are likely to be judicious and repay their obligations –– and BNPL risk models are likely to hold. However, it seems we are entering into a new economic climate, where more consumers may default. Will existing BNPL business models hold?
We need to unearth sustainable BNPL business models such that BNPL providers can thrive in times of abundance as well as in times of economic instability.
Appropriate, risk-based regulation
Regulators everywhere are actively and deeply considering how to protect customers from an overextension of credit or credit stacking (gaining credit and then paying off credit with credit).
As my colleague Will pointed out in his recent PV post, in the U.S., the Consumer Financial Protection Bureau (CFPB) has been reviewing the market activities and plans to identify potential guidance or rules advising that BNPL lenders adhere to baseline credit card protections previously introduced by Congress. The foundations for consumer safety and ensuring repayment align with bringing success to the product.
The United Kingdom has a goal of putting in place legislation mid-2023. One of the main goals is to ensure there are consumer affordability checks in place. Advertising is another key aspect under review to ensure it is not misleading or unfair to the consumer.
We need these regulations in place to ensure the right balance of innovation, competition, and safety for consumers.
Merchants provided credit to customers hundreds of years ago. Decade by decade, innovative companies with new solutions take risks to reinvent this offering. BNPL is the latest evolution and makes sense in our digital economy . But to succeed, it must continue to adapt – I made four suggestions. Do you have others?
1 BNPL Global Stats: https://www.fortunebusinessinsights.com/buy-now-pay-later-market-106408