Buy Now Pay Later (BNPL) has gained significant popularity in recent years. The BNPL market is expected to reach $3.98 trillion by 2030. Banks, fintechs, and regulators all have a part to play in ensuring that BNPL services are used responsibly and do not adversely impact the financial health of consumers, and subsequently, financial institutions.
By John Barber, VP Europe, Infosys Finacle
Over the past few years, Buy Now Pay Later (BNPL) has gained significant popularity for retail purchases. While the concept itself isn’t particularly new, it has come into prominence as the growing availability of fintechs and banks with real-time analytics for credit assessment, open APIs and cloud, has made it easier for retailers and e-commerce platforms to offer various payment plans for customers. Typically, in BNPL transactions, the service provider, whether it is a bank or a fintech pays the merchant and subsequently collects it from the customer over a pre-determined period with interest.
The trend has been catching on across the globe with the BNPL market expected to reach $3.98 trillion by 2030. In Europe, the UK has emerged as one of the largest markets for BNPL.
BNPL has both pros and cons
The growing popularity of BNPL is understandable given the convenience it offers for consumers while providing a growth opportunity for retailers as well as banks and fintechs. Larger purchases become more affordable since there is flexibility to pay over time. BNPL is more convenient than a regular loan because it typically requires no collateral and the approval process is super quick. In addition, customers often receive attractive discounts or rewards for choosing a BNPL pay-out option. For merchants, BNPL is an opportunity to increase sales, widen their customer base, and minimise cart abandonment rates.
Despite its many advantages, BNPL has its own dark side. For instance, easy access to credit can encourage overspending, especially among younger consumers. The high interest rates associated with most BNPL services can lead to debt accumulation over time, thereby negatively impacting credit ratings. For example, a study by Barclays revealed that nearly a fifth of 18–34-year-old BNPL users have had their credit score impacted due to missed BNPL payments. Also, a quarter of BNPL users expressed concern about their ability to repay their BNPL bills.
The lack of awareness about these possible consequences can negatively impact consumers’ financial situation in the long term. Therefore, as with any financial service, consumers must be educated on the potential impact of using BNPL services and encouraged to read the terms and conditions carefully.
This is especially significant in current times where the cost of living in the European Union (EU) is rising steadily due to high inflation.
Responsible BNPL
Banks, fintechs, and regulators all have a part to play in ensuring that BNPL services are used responsibly and do not adversely impact the financial health of consumers, and subsequently, financial institutions.
Education and awareness is the top priority. Sharing information on the overall interest rates, payment terms, and the consequences of non-payment can help discourage consumers from taking on debt that they cannot afford to repay. Banks can also offer regular payment reminders so that consumers can plan their expenses and be better prepared to pay off their debt. They can also offer credit counselling and information on alternate credit options. For instance, Santander Bank in Spain has launched a financial education campaign called Cuentas claras (Clear Accounts).
Regulators must also play their part – by crafting policies that require BNPL providers to disclose key information to consumers, to enforcing credit assessments of consumers before approving BNPL applications. In addition, they can work to establish lending standards for BNPL providers. Also, having a robust system in place to address consumer complaints relating to BNPL can help curb malpractices. The European Banking Authority (EBA) has already issued guidelines for BNPL providers to establish responsible lending practices. The UK’s Financial Conduct Authority (FCA) has proposed regulations for BNPL providers, including mandatory affordability checks, clear disclosures of fees and charges, and requirements for fair and transparent debt collection practices.
Given its inherent advantages, the BNPL trend is here to stay. However, for banks and fintechs, it is in their best interest to ensure that they put the right processes and policies in place to ensure that BNPL services are used responsibly.
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