By Michael Pierce · May 05, 2022
6 minute read

BNPL: impending regulation, and associated impacts

BNPL credit card

With the continuing influx of BNPL players into the digital retail space, it’s just a matter of time before a more-definitive regulatory announcement around BNPL is made, which will undoubtedly affect the shape of BNPL and its role in consumer financing. Michael Pierce looks at the opportunities and risks in financial services regulation.

Michael Pierce, Commercial Director of Banking at FintechOS
Michael Pierce, Commercial Director of Banking at FintechOS

As we saw in my previous article, the innovation path of buy now, pay later (BNPL) has been forged by challengers originally outside the normal banking and lending world. As rapid mainstream adoption continues, the established financial services world has had to play catch-up, and this includes national regulators looking at BNPL’s meaning and reality.

Broadly, the question for the wider industry will center around consumer welfare, affordability, and whether BNPL should be drawn into existing boundaries of consumer lending, such as overdrafts, personal loans, and credit cards, or if new and distinct regulation is required.

Inflation, and consequently, interest rates are on the rise. Just this week, the UK has posted the highest inflation rate in over 30 years, and the question remains: ‘how will this impact consumers and their purchasing power?’

In addition, regulators and providers will need to figure out where hard rules need to be applied, versus the lighter-touch guidelines and best-practice recommendations that regulators sometimes opt for when technology and services are new and unexplored, such as in open banking. There will be an eye to balancing compliance with maintaining a good degree of competitiveness and room for innovation in the industry.

Fortunately, regulators like the UK’s Financial Conduct Authority (FCA) have a good track record of rapid and well-thought-through regulatory reform, and have pro-actively targeted the BNPL space for both industry consultation and direct intervention.

In fact, in a response to the Woolard Review, the FCA agreed there “is a strong and pressing case to bring buy-now, pay-later business into regulation” and has recently collected viewpoints from consumer bodies and the financial services industry.

Questions around BNPL that could be of concern to regulators:

Consumer welfare

  • Does BNPL actually help those with poor credit ratings?
  • What data and what kind of affordability checks are appropriate in order to make BNPL-based lending available?
  • Does BNPL carry new or higher risks of creating indebtedness, or does it help consumers with their cashflow needs?
  • How should BNPL providers deal with late payments, debt collection, customer communications, and complaints?

Fraud and compliance

  • What kind of fraud risks will consumers and businesses be exposed to, and are existing systems sufficient to protect everybody?
  • Should split-payment BNPL products be presented as standard loans, and does presenting it otherwise mislead consumers?
  • How would the industry monitor and control borrowing limits and harmful spending patterns?
  • How will merchants and lenders understand and deal with risk across complex new patterns of delayed payments and lending?

Is BNPL here to stay or will it be ‘shut down’ by regulators?

BNPL has, generally, been pioneered by customer-centric challenger fintechs, so there shouldn’t be much resistance to financial services regulation, and we’ve already seen a lot of positive and pro-active work done by UK players as part of the FCA consultation process. Early evidence indicates acceptance of BNPL as an extension or fusion of elements already deemed normal in the retail space, such as store credit and deferred payment schemes.

Instead, regulators will look for “abuse”, where lenders are considered unfair or even predatory. Financial services regulation for BNPL will likely revolve around provider risk and compliance, as part of integrating BNPL debt into standard banking risk models, so the more transparent and ‘explainable’ BNPL lending solutions are, the better.

BNPL credit-checking will be rapidly consolidated into the traditional credit scoring model, and data landscape and, therefore, adhere to the existing standards of consumer rights and data protection, according to jurisdiction.

Governing entities will now provide oversight, and a single source of truth when determining a consumer’s credit exposure, across a number of BNPL providers. This is also being fueled by the rise of PSD2 adoption, making consumer financial data more accessible.

The space will still be unregulated in many global markets for a long while, but positive lessons can be taken from the more rapidly-regulated markets, like the UK.

Given the concerns in the BNPL space, should established banks and lenders ‘wait and see’?

BNPL is a touchstone of the changes in consumer perception and behavior, and indicative of a switch to a more-experiential economy. Therefore, most banks and lenders will likely have to enter this space in some shape or form to remain relevant in the market, and about half of all financial institutions will be actively doing something within the next three years.

Some of the boldest plays are already being made, so the pressure to define a strategy that will elevate and differentiate a BNPL offering versus peer brands will actually increase on a month-by-month basis from now on.

Every bank has to have a strategy, so if the decision is to wait, then this should be fully weighed in the wider organizational business plan, and not a function of ignorance or fear.

How can established banks and lenders move forward with BNPL?

A focus on fairness for customers and clarity in customer experience (CX) is the first and foremost consideration in any BNPL application. Reflect on careful and transparent design of product criteria, which should not just be limited to the lending product itself, but should also include how pre- and post-sales filters and monitoring can be applied automatically to improve personalization and credit-risk management.

In both these points, experienced lenders are in a good position because they already design products that are fair, responsible, and regulated. Additionally, established financial institutions have a legacy of trust and stability that cannot be replicated by market challengers. This legacy actually makes them the perfect BNPL providers to a significant portion of the population.

In fact, according to our consumer report, the BNPL Wayfinder, “people are significantly in favor of bank-provided BNPL… 54% of people more likely to choose a BNPL option if it’s provided by a bank, with 34% being neutral and only 12% saying a bank brand on a BNPL offer would preclude them from choosing it”.

As with other areas of financial product innovation for established financial institutions, the key is the ability to involve a multi-disciplinary team and collaborate around a single platform covering products, web and app content, business logic, customer journeys, customer services, and reporting. This means the inclusion of software experts, as well as designers, CX specialists, customer services, product managers, compliance, and growth teams.

High-productivity fintech infrastructure for BNPL

FintechOS is not just new-generation technology, it’s also an enabler of agile, collaborative, and iterative methodology. With our high-productivity fintech infrastructure, we can provide a customer-centric BNPL solution that can differentiate your offering in exciting new ways.

To find out how we can help, visit our BNPL solution page.

Buy Now Pay Later Wayfinder report

BNPL Wayfinder: Part 1

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