The future of buy now, pay later: Part 2

September 28, 2022

This is a continuation on an article published on September 14, 2022. Here is part one if you missed it.

Last Christmas, Klarna published research claiming that 25 percent of consumers were concerned about credit card interest and late fees, and that half of all consumers had incurred debt through credit card lending.

- Payments Cards and Mobile

One of the industry’s most notorious companies, Klarna, weighted in on the issue, with its CEO Sebastian Siematowski stating that the wealth gap is a big trouble in credit card lending, as people who are able to pay their balances off each month reap around $750 in rewards while households that can’t afford to do the same incur in average $21 dollars in late fees, setting them back in comparison with the wealthier users.

While his incendiary comments might ring true, most credit products offer a window of time before interest starts accruing, in addition to the fact that the credit rewards offered by these products can be enjoyed by all users regardless of income or credit status.

Let’s not forget also that Klarna charges late fees itself as well, and it will not hesitate to engage debt collectors if the need should arise. And it does, as many people have seen themselves in debt after the misuse of BNPL.

Citizens Advice UK said that British consumers paid BNPL players £39 million in late fees last year alone, while digital security specialists Entrust say 32 percent of US consumers who took on BNPL had missed at least one payment.

- Payments Cards and Mobile

Some other BNPL providers, however, claim they do run “stringent” credit checks, and they turn away 25% of applicants. This is not enough, however, as there are no credit checks required by law, and one might assume that therefore there are no checks on how much borrowing consumers do in between credit cards and BNPL.

But, so called “folk wisdom” is making an appearance, as according to a survey by Marqueta, 56% of UK consumers revealed they think BNPL is an easy way to fall into debt.

Regulation in the horizon

All things considered, BNPL looks like an attractive alternative to credit, as its relaxed credit availability with little to no background checks open the market to new consumers, which, despite high provider fees, benefits both consumers and merchants.

However, BNPL is still young, and regulations might be in the horizon.

Regulators aware From Australia and New Zealand through North America, the EU and UK, regulators have promised to take action to curb consumers’ propensity to spend on BNPL as a means of avoiding credit checking.

- Payments Cards and Mobile

With the forecast looking dire in terms of inflation, job insecurity and rising living costs, regulation is very much needed if we are to protect consumers from immeasurable debt. The question becomes, which direction will legislation take.

If we look at the UK, a review by former interim CEO of FCA, Christopher Woolard, revealed that regulating BNPL with the same parameters we use for traditional credit is not a good idea as there is a very likely possibility that regulation could make BNPL too similar to credit cards, so the key would be to regulate BNPL to make it safer, but not virtually non-existing.

The Treasury and FCA agree that consumers should be protected, but do not want to regulate BNPL out of existence. However, it’s still up in the air as to how rules relating to creditworthiness assessments and pre-contractual information should apply to BNPL.

- Harry Eddis, Fintech partner, Linklaters

Some companies such as Payments Europe have stated they are in favor of clearer regulation, while in the USA, some companies have been found to review their policies to make their terms and conditions more in line with traditional credit products.

However, while regulation is on the table, it is not the only tool that could be used to level the field when it comes to BNPL.

According to Payments Cards and Mobile, the capacity to check credit histories automatically via an API call thanks to Open Banking could help banks to manage the risks of BNPL.

Regulation could prove beneficial as long as there is a balance between consumer protection and the potential growth of the industry, however, this regulation won’t come into effect overnight, as there are many components that companies need to put in place first.

As the cost of living and inflation continue their rise, we can expect more consumers to be tempted by the proverbial song of the siren that BNPL can result to be if left unchecked, however, it is an industry with great potential, and it is in our hopes that whatever regulation comes into play won’t snuff it out completely. Balance is key. 

Want to learn more? Check out Payments Cards and Mobile’s full write-up here.

What is your stance on BNPL? Share your thoughts on our LinkedIn page.

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