Fintech Payments: How BNPL Is Shaking up the Lending Sector

By Julia McColl
An examination of the 'buy now, pay later' phenomenon, from its effective distribution networks to its future implications for the fintech industry

The introduction of Buy Now Pay Later has affected one of our most fundamental habits; it’s changed how we shop. With an estimated 17 million of us actively using this payment option, the trends all suggest one thing – that more and more of the UK are adopting it as a way of life. 

It’s easy to see why. We’ve been talking about embedded finance for years as an industry, yet I can’t think of a better example than how the Buy Now Pay Later providers have bought this to life. 

Effective distribution networks

A key part of their success - and a barrier to others wishing to move into this space, has been their extensive distribution network. Retailers have been quick to sign Buy Now Pay Later providers up, with a promise of high acceptance rates, frictionless journeys and increased spending from customers as a result.

Many financial services companies have products that easily compete, such as instalment payment plans for credit cards or personal loans. Some are already offering or promoting similar services, such as allowing you to split a payment into instalments after the purchase has been made. Yet they all require much more effort and consideration than simply clicking the Buy Now Pay Later provider at the checkout. In that sense, Buy Now Pay Later really is an excellent example of a product meeting the needs of consumers. 

Considering the implications

But it is not enough to meet consumer needs without considering the financial impact of these products. There is much criticism that they encourage unnecessary spending, setting unachievable expectations for being able to buy what you want when you want it.

With 30% of Buy Now Pay Later users aged 20-30, there is concern that this could create negative spending habits that stay with them throughout their lives. The counterargument is that used well, Buy Now Pay Later products are often cheaper than carrying the balance on your credit card, especially as the retailer pays the provider, often enabling interest-free instalments. 

The Woolard review laid out its views on regulating the sector, calling out affordability, conduct and forbearance as particular areas of focus. We can expect to see much tighter controls across all three areas.

Obvious items to go after would be limiting the way in which customers revolve, or increase their lines of credit over time, capping the amount of fees and introducing interest-free repayment plans for those in financial difficulty. This will create not only technical requirements for the Buy Now Pay Later providers, such as the introduction of income verification, for example, but will also shape their processes and most likely, their profit. 

What next?

If the industry is indeed forced to make such changes, it is hard to see how the model will continue to work. Certainly, the customer experience will be impacted – many more customers will not be able to access the product and even those that can may be required to prove their income, in a way that they do not need to do today. Will the retailers continue to use such services if the number of eligible customers drastically reduces and the levels of friction increase?

At this time of year, we’re particularly focused on our spending. Yes, there are many customers using Buy Now Pay Later and I have no doubt that many are extremely happy with the product and the flexibility that it enables. Yet we have a duty to ensure that we are doing the right thing for our customers. We can only hope that someone will find a way to do both. 

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About the Author: Julia McColl is the Commercial Director at Chetwood Financial.

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