Author: By Neha Mittal, CEO of Divido
Buy now pay later (BNPL) is without a doubt one of the biggest trends in the fintech world right now. Within the last few months, billions of pounds have been spent on investing in and acquiring hyper-growth firms across the globe, while neobanks like Revolut and Monzo have announced their intention to compete in this hottest of markets.
However, all of the noise is clouding the fact that BNPL is just one payment option in the retail finance suite of credit options, which ranges from 0% credit to instalment plans, revolving credit and, yes, BNPL.
But as BNPL squares up to regulation, new market entrants are set for a rocky twelve months making it even more important to be clear on the use of retail finance versus BNPL; and the difference between BNPL as a responsible lending option, in the hands of the regulated traditional lenders, versus BNPL as an unregulated proposition – ahead of new legislation being brought in.
The issue of trust
As the Financial Conduct Authority (FCA) continues to escalate its agenda over the next year or so, continued negative headlines and, therefore, perceptions of BNPL are expected to test those operating in the industry.
The Woolard Review findings, released by the FCA in January of this year, sent shockwaves through an industry that had been riding high on record-growth success, as ‘Klarnage’, a term coined after market leader Klarna, ensued.
And the impact of regulation is not limited to the UK. Australia has already ushered in a self-regulation model for BNPL, to protect the end consumer, while the US is partially covered under existing federal and state laws. The EU has also tabled a series of measures to be considered and voted on in the coming months to update its existing Consumer Credit Directive.
Until this point, fintechs have dominated the market, shaping the space in response to consumer demand but, as regulators suggest, without consumer protection. For the established lenders, they have looked on, paralysed, standing at base camp as they decide whether to buy, build or partner to get a foothold, all the while allowing the disruptors to climb on ahead.
Now, however, the promise of new regulations has levelled up this race to the top, as one thing banks are familiar with is regulation and, whilst the new market entrants grapple with these unforeseen obstacles, traditional lenders are able to partner with whitelabel providers and continue forward, uninhibited.
Ultimately, this means the market has opened up for established lenders to bring their already-trusted brands into the BNPL space, fast, and partner with retailers to deliver something much closer to the FCA’s recently proposed Consumer Duty – a series of standards with a focus on consumer outcomes, especially for the most vulnerable in society.
The importance of control
Retailers that offer BNPL options at the point of sale risk their own brand integrity as well as control of the customer journey and the all-important data that generates. Do they want to continue giving these firms such prominence in their e-commerce journey? And if so-called ‘Klarnage’ were to snowball, as regulation envelops the sector, will retailers risk their own brands rather than uncouple from unregulated providers?
The amount of transactional and customer data that BNPL providers can gather is considerable, meaning they can generate deep insights into consumer behaviour. These sorts of insights should be available to the retailer only; it is a trade off for giving up valuable real estate on their website to well-known BNPL providers.
With the mixed reviews around the BNPL space, it is perhaps unsurprising that consumer confidence in these solutions should be shaken. It is not uncommon to see stories in the national media of people getting into debt through BNPL, which evokes memories of the damage unregulated pay-day loans brought about, increasing pressure on the market.
Retailers spend years building brand loyalty and many fear becoming attached to fintech firms that are sure to come under increased scrutiny as regulation begins to bite.
The answer comes in flexibility. BNPL is too often seen as a one-size-fits-all solution, with set branding and finance options. A flexible approach that offers control over these factors will prove the difference for both lenders and retailers looking to increase their share of this sizeable market. Consumer spending habits are evolving but how the industry reacts to this will be the difference between success and failure.
