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What to expect from the next stage of 'Buy Now, Pay Later

BNPL is set for consolidation with over 170 startups vying for dominance across segments, writes APEXX Global's Rodney Bain.

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The ‘buy now, pay later industry is set to split in two. This bifurcation of BNPL business models increasingly will mean industry participants fall into two camps defined by the level of attention they are able to command. 

At present, BNPL lending currently accounts for just over 1 per cent of the credit market, with the global market size expected to reach $20.40 billion by 2028

As the industry continues on its rapid growth trajectory, current and prospective participants in the market watch closely for indications of the shape, scope and impact of the regulation all expect to arrive in the relatively near term. 

But regulatory intervention is not the only moving part likely to determine the future shape of this exciting segment of the credit market. Just as significant as the first move of the various regulators will be the strategies chosen by the key players. 

Those without the high levels of consumer loyalty and active customer bases enjoyed by brands like Klarna and Afterpay are likely to continue servicing e-commerce merchants while branching into in-person consumption channels. 

This will exert increasing pressure on merchant fees and margin as competition intensifies. Key growth verticals could include opening new lending streams and stretching lending thresholds to better rival Credit Cards, Personal Loans and Car Finance products with the consumers they hold strong relationships with.

The second group of BNPLs, with more robust consumer relationships, will likely pivot to become global financial super apps, leveraging consumer attention, brand recognition and loyalty to capture user spend and financial services consumption, including lending, banking, insurance and investments. 

The consumer acquisition and funding they attract provide the bandwidth to innovate and open across new markets. While this could stand to further disintermediate the relationship between merchants and customers, it will be partially offset by the attraction of BNPL payment options for consumers. 

For retail banks, BNPL is a feature rather than a product. But the opportunity is clear - increased customer engagement, new revenue lines and the protection of existing revenue as card issuing revenue is cannibalised by BNPL expenditure. 

However, there are many challenges for banks to enter the BNPL space successfully. This explains why the majority of banking activity in the BNPL sector has come from challenger and neo-banks which are better able to move quickly and adapt to fast-evolving market conditions. In the UK, Revolut and Monzo have made the most substantial moves into the BNPL market so far.

Though the sector is currently unregulated, with BNPL increasingly challenging the traditional credit market, regulators are quickly taking stock and are working to bring BNPL into their remit. 

The speed of industry growth means that BNPL usage has outpaced consumers’ understanding of the credit products they are taking on and the potential risks associated with them. These risks become more material when paired with a lack of consumer protections, appropriate assessments made on behalf of the consumer regarding their ability to service repayments and fair treatment in the event of a consumer falling into difficulty. 

These are all necessary to improve the fairness, transparency, and integrity of the BNPL market for all. 

It is critical that consumers are protected. But it is also important that regulation is proportionate, progressive, and structurally appropriate. Regulation should distinguish between product types and the degree to which they might present potential harm to consumers or to the wider credit market. 

For example, there is a fundamental difference between the low value, high frequency loans issued by BNPL and traditional lending products which have remained largely unchanged for decades. A key challenge for regulators will be to introduce regulation that is non-discriminatory to consumers with thin credit files. This could also be an opportunity to revisit frailties in the existing credit market and the wider infrastructure of Credit Bureaus that stand to benefit from better data transparency and velocity. 

When used correctly, BNPL has many benefits for consumers, including convenience, efficiency, and customer experience, and they should not be subjected to restricted access or penalised for using the credit line. 

This is particularly important when it comes to credit worthiness and access to other products such as mortgages and personal loans. Regulation should also seek to ensure consumers using BNPL responsibly get the same benefits for good repayment behaviour as they do with other credit products and can use them for credit building purposes.

When it comes to putting regulation into practice, the UK is very much leading the charge. Australia, New Zealand, Canada, and the US are likely to present key short term regulator battlegrounds for BNPL firms and the EU is expected to introduce regulation across member states where overlaps between national and EU Level rules would support tougher treatment of lenders.

In 2022, we will continue to see new providers launching and existing providers consolidating. BNPL is a game of scale and consolidation will be a key feature of an industry with over 170 startups vying for dominance across segments. As regulatory requirements take shape in the UK, and in further markets in due course, there will also be an appetite for an aggregator model to help merchants adapt to different market and state level regulatory requirements. 

Ultimately, the BNPL market is facing regulation and consolidation. This is necessary to protect customers and for the industry to grow. But it’s critical that this is not at the expense of customer experience, transparency, and innovation.

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