Buy Now Pay Later.. Maybe (?)
The allure of BNPL is much about lending in an instant. Doing so responsibly is the key to sustaining its growth.
BNPL (Buy Now Pay Later) is not a new thing.
In the mid-2000s, at Citi, we were already offering ‘equal payment plans’ to our credit card customers, to allow them to spread (high-value) purchases over interest-free instalments. This was offered at point-of-sale (POS) too. Offering this to new customers at POS back then presented two issues — generating an account number in real time (not as much of a problem anymore) and conducting sufficient checks instantaneously to extend credit on the spot.
The world has changed in many ways since then — the ubiquity of e-commerce, mobile penetration and the availability of credit, behavioural and transaction history on tap, to name a few.
The Square-Afterpay tie-up makes great sense, and we can expect to see ecosystem consolidation in this space. Fintechs, payment service providers, financial institutions and banks offering payment acceptance services will be looking for synergetic opportunities. And why not? Customers are demanding this payment method and merchants will want to offer it. As the world bounces back from Covid, incentives to boost spending are welcome. There doesn’t appear to be a catch in the opportunity to spread any purchase (big or small) over interest-free instalments — at least not for customers and merchants.
The slick retail experience and the buzz around market consolidation overshadows to some extent the unsolved conundrum of undertaking robust credit checks and doing so on the spot in order to lend in an instant. The distinction should be made here between existing and new customers. Offering BNPL to pre-vetted customers is safe and responsible. While the overall retail and payment experience can be innovatively designed to be smooth and friction-free, in this scenario, I’d argue there is little recent innovation in the underlying product itself. To the best of my knowledge, the issue of conducting traditional credit checks for new customers and doing so instantaneously hasn’t been solved — and this is crucial for upholding the experience and allure of BNPL for many. The credit checks undertaken by most of the offerings today (for new customers) falls short of the standards and expectations of regulated entities extending credit. Most providers do not charge interest but impose late fees on missed payment due dates. The data around missed payments, outstanding receivables and late fees is scant. 18–29-year-olds have been enthusiastic adopters of this payment method. Indications are that this demographic will also be disproportionately impacted by any Covid-associated economic downturns. Compared to regulated financial institutions, some of the new entrants in this space are also presumably not required to afford the same protection and duty of care to customers in hardship struggling to pay off their debts.
The fledgling BNPL industry is largely unregulated. The threshold for purchase values is generally low. While it’s rate of adoption is growing rapidly, it is still relatively small in proportion compared to other payment methods. As BNPL attracts further adoption and purchase value thresholds are raised, bad debt will inevitably increase, more so in the absence of any meaningful risk and credit underwriting in place. There is consensus across the industry that further regulation is required. The goal should be to keep the spirit of innovation alive and kicking and offer the same if not enhanced levels of customer experience — but doing so in a safe and responsible manner.
