New BNPL regulations will transform the space for fintechs

By Melba Montague
Lack of BNPL regulation will result in growing financial problems for consumers during cost-of-living crisis, says Melba Montague, of Genpact

With record-high inflation and a UK recession looming, the current economic climate will undoubtedly worsen over the coming months. As cash and disposable income become tighter, we can expect to see more people turn to non-bank loans as a means of alternative finance, with Buy Now, Pay Later (BNPL) models anticipated to feature prominently.

Unlike other traditional methods of lending, BNPL is still unregulated by the FCA as of 2022, meaning consumers lack protection from the Consumer Credit Act and access to relevant Ombudsman support. Arguably, BNPL has made it easier to create problem debt, with research showing that a third of UK BNPL users are unable to manage payments under their plan. Although the UK is likely to be at the forefront of new regulations being recommended by the FCA, not until mid-2023, it’s looking like it will be too late to address the financial problems consumers face today. It’s clear more can be done to warn of the revolving door of debt associated with BNPL.


Beware of the pitfalls

BNPL skyrocketed in popularity due to its convenience, lack of interest rates and simple approval process. However, the hidden risks that come with it, from decreasing credit scores to debt accumulation, cause more harm than good to consumers who are vulnerable and feel more than just a squeeze.

Many BNPL users want their usage to contribute toward their credit score, which is not a service currently offered by BNPL providers. In fact, late payments can knock credit scores, with fees often being much higher than credit cards. Consumers who fund purchases with added funding, such as credit cards face an even higher risk of debt. Not only will this adversely impact younger BNPL users who are less financially literate, but an overall lack of BNPL regulation could potentially lead to even more challenging outcomes for society, including mental health and domestic issues. 


Be prepared for heightened regulatory focus 

No one should be caught on their heels when regulation becomes concrete, especially financial institutions and BNPL providers. Banks have a responsibility to identify customers at risk and support them with appropriate measures. Consolidation of lines of credit should be recommended as it allows consumers to turn spiralling debt into manageable loans while pre-empting the need to borrow more from a wider pool of BNPL providers. 

BNPL providers are obliged to execute the growth commitments made to investors whilst ensuring that maintaining operational stability does not have an adverse impact on the customer experience, which they now need to place front and centre ahead of heightened regulatory scrutiny. 


Promoting financial resilience is an imperative necessity 

In advance of new regulations, banks also have an opportunity to promote financial resilience to improve their valued customers’ financial health. With open banking-enabled solutions, they can provide insight to customers looking to monitor and consolidate their spending.

The educational aspect is equally important and necessary to avoid exacerbating an already fragile cost-of-living crisis. Prioritising financial education at a school level is one approach, given that 50% of Gen Z are BNPL users. Not to mention starter bank accounts, debit and credit cards and investing programs for Gen Alpha are increasingly popular. Turning the onus of accessibility and transparency on banks ensures that customers receive tailored, personal support and counsel on their finances, which in turn boosts financial literacy.

BNPL providers must also ensure their collection process empathetically engages with its customers navigating through financial hardship. This can be done by data-driven segmentation and gathering insights from data, technology, and AI to align with BNPL users’ specific communication preferences and chosen payment methods.


Switch on gamification 

Aside from conventional methods of recourse, banks could employ gamification in the form of credit comparison tools and in-app rewards to encourage better money management. This can help customers reduce debt and begin to improve credit ratings, in turn providing access to appropriate credit products, potentially including BNPL.

With the rising prominence of neobanks like Revolut and Monzo, engaging gamification is a logical next step in helping consumers understand their finances better. Not only would this engage younger consumers, typically digital-native and more averse to traditional credit, but it would increase financial literacy and improve financial health across the board. A balance must be struck to ensure that apps remain fun and engaging while not undermining the provider’s authority.


BNPL providers, such as Klarna and Clearpay will remain a ubiquitous presence at the checkout page, from online shopping sites to food delivery apps. Short-term lending like BNPL has exposed consumers to quick and easy credit by removing the barrier of upfront payments and offering instant gratification. BNPL schemes can be particularly appealing as consumers tackle rising costs of living, but there is no doubt that it increases individual risk as they borrow beyond their means without sufficient financial advice and regulation.


About the author: Melba Montague is Head of Banking and Capital Markets for Genpact.

Melba Montague, Head of Banking and Capital Markets, Genpact
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