Forthcoming regulations and the cost-of-living crisis are going to increase the scrutiny on Buy Now Pay Later (BNPL). To emerge with their reputations enhanced they’ll need to decide who their customers really are.
The rapid growth of BNPL has led to mounting concerns about the sector. And it’s fair to say that BNPL lenders have scored some reputational owns goals: for example, with marketing campaigns encouraging people to borrow to cheer themselves up. There are also worries about providers offering to spread the cost of essentials such as groceries.
As the cost-of-living crisis deepens this year and with increasing numbers of households struggling to make ends meet, BNPL lenders are going to need to work hard to ensure that they are seen as responsible lenders. Communicating clearly to help educate customers is vital, as many don’t see BNPL as borrowing.
Providers will also need to ensure that their affordability checks are robust so that BNPL lending isn’t seen to be driving problem debt – particularly amongst vulnerable customers.
Regulation is on the way
Fears that BNPL lending will fuel problem debt saw the Treasury announce plans for the FCA to regulate the sector. In doing so it needs to strike a careful balance: widely available, easy to use, interest-free credit is a boon for many customers.
Even before regulation arrives – and there are complaints that it is taking too long to implement – the FCA has made progress by persuading some providers to improve their terms and conditions.
The FCA requires firms to put the interests of consumers first and the introduction of the Consumer Duty will strengthen this – requiring a shift in mindset for many BNPL providers because to grow, they have typically treated the retailers as their customers. BNPL payment options have become tightly integrated into online retailers’ checkout processes. The lenders promise increased sales with fewer abandoned shopping carts and higher cart values. In return, retailers pay BNPL providers a commission.
BNPL lenders will need to focus on consumers, not retailers
Focusing on responsible lending and affordability is likely to lead to loan acceptance rates reducing, and some tough conversations with retailers. There’s a risk of a ‘race to the bottom’ as retailers shift to less scrupulous lenders – with higher acceptance rates – in a bid to maintain sales.
BNPL FinTechs are also facing increased competition from banks. Current account providers have a crucial advantage – they have a much clearer view of customers’ financial position and are better placed to make accurate affordability assessments. This enables them to cherry-pick the most profitable customers – those who can repay on time and in full.
So, how can BNPL providers emerge from the next few months with their reputations enhanced? They’ll need to demonstrate a laser-like focus on responsible lending. And they’ll need to have robust processes in place to identify those who are struggling to make their repayments – particularly customers who are in a vulnerable situation – and provide access to help and support.
Most importantly, Buy Now Pay Later firms will need to sharpen up their communication to ensure that not just consumers and retailers, but the media, regulators and policymakers clearly understand how they are placing the needs of customers at the heart of everything they do.
Ian Williams, director, Financial Services and Corporate
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November 20, 2023
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