Buy now, pay later (BNPL) is an old payment method which is again very new. And that could be a problem for BNPL fintechs who are just starting to learn about the world of credit and the pitfalls associated with traditional banking infrastructure.
Recent data from FIS – one of many payment processors – places BNPL in a $ 100 billion industry, or 2.1% of global e-commerce transactions. Marqeta, another processor, claims BNPL’s transactions on its platform have increased 350% this year.
The success of the BNPL format has been attributed to the lift it offers merchants at checkout and the convenience it offers to consumers looking to avoid interest payments and debit card fees. Last year, at least 91% of consumer loans in California were BNPL.
For BNPL providers, moving to a modern architecture for loan management and servicing can minimize third-party merchant risk.
According to Klarna, one of BNPL’s largest suppliers, the average order value at checkout increases by up to 45% when buyers have the option to pay for their purchases in four interest-free installments. BNPL is so convenient, compared to old-fashioned installment loans, that consumer advocates fear it will encourage people to take on more debt than they can handle.
If this happens, BNPL’s suppliers could be seriously affected in the event of an economic downturn. In a report released this summer, Fitch Ratings, one of the three major US rating agencies, called BNPL’s debt performance “opaque.” The report cites a survey in which nearly one in three respondents (31%) had either been late with a BNPL payment or incurred late fees.
But the other side of BNPL isn’t just consumer credit risk, which BNPL providers say they can manage with non-traditional data-driven underwriting. BNPL providers also face a double risk on the merchant side.
Three-sided loans, in which a lender relies on a merchant to act as a reseller, became the subject of regulatory scrutiny with the passage of the Dodd-Frank Wall Street Reform Act and consumer protection in 2010.
Dodd-Frank did a lot of things. Among the most influential provisions was the creation of a Consumer Financial Protection Bureau with the power to act against any supplier of consumer financial products or services that engages in “unfair, deceptive or abusive acts or practices in connection with it. with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.