What responsible BNPL means nowadays and how new regulations may impact the ecosystem

'We should talk about responsible lending, but it does not make any sense to circle out one particular form of consumer credit.'

What are your comments on the recent controversial discussions about BNPL? How do you see the need for BNPL market regulation in relation to the revised consumer credit directive (CDD)?

There has been a lot of misconception about BNPL recently. It is a very convenient payment method and has grown in popularity in the past few years, especially in the US and UK. In Germany, however, these payments have existed since the early 70s, and they are the most popular type of payment. And that’s because they took a lot of risk out of distance selling business. As a consumer, you would be able to make an educated buying decision without having to pay beforehand. You would be able to assess the quality first and return the goods before paying. And a merchant not delivering in time or at all would not receive any money. It has always been a consumer centric product.

Moreover, traditional BNPL products like the ones that are so popular in Germany since decades are primarily focussed on consumer protection. They are not even predominantly used for instalments; more than 90% of all BNPL transactions in Germany are paid back in one single payment, less than 21 days after delivery.

If people overspend, they usually use multiple credit opportunities altogether. We should talk about responsible lending, but it does not make any sense to circle out one particular form of consumer credit. BNPL companies that are in the space for a long time have also proven to be responsible in how they look at consumers defaulting on claims. They are not incentivised at all to hand out credit to people that are not able to repay, since they have to compensate these losses. This is not the case for credit card companies, where the issuing bank will ultimately be responsible for the payment.

So what happens if the CCD now puts a lot of regulatory burden on BNPL products? What if any BNPL transaction gets treated like a consumer credit? Would it change the way BNPL products are integrated into the checkout? Could it lower conversion rates for BNPL products? It might. But it is really beneficial to the consumer? Evidently not. Does it reduce young people's indebtedness? It is highly unlikely. BNPL volume will simply be shifted back to credit cards and e-wallets. In my opinion, that is more in the interest of the card schemes than of the consumers.

So how do responsible BNPL products look? Why does more regulation hurt the financial weak consumers instead of protecting them?

Many young people do not use traditional bank products anymore. They simply buy things and decide on a short to medium time frame financing option like BNPL payments. A lot of these transactions are untransparent to retail banks and credit agencies, which makes their consumer data pools less significant for credit scoring.

Being in the BNPL space for so long, we see a lot of people with low credit scores who are unable to obtain a bank loan, but who continue to pay their BNPL instalments very reliably. Financially weak consumers can use these products to regain some financial stability. Many consumers with tight budgets are happy to have these options, and it helps them greatly in their financial household planning.

Traditional BNPL products are always tied to a purchase, so there is a clear equivalent value of goods. Credit cards and bank accounts, on the other hand, are sources of free cash. A lot of cash can be wasted on the wrong things. Cash has the highest risk of being spent unwisely for someone in financial trouble. Therefore, free cash financing instruments such as bank loans should remain regulated.

What is the impact of the recently announced launch of Apple Pay later on the BNPL space?

In order to broaden their market share, Apple is trying to make their products more affordable for consumers with less budget. Offering financing options makes perfect sense. Especially since Apple has a lot of additional ties to every Apple user. Just imagine, you miss a few payments and your Apple-ID gets disabled.

But I doubt Apple will become the dominant BNPL payment provider. Market share will increase their exposure to regulatory and antitrust scrutiny. Perhaps Apple should partner with some more financial institutions and open up Apple Pay as a platform to the BNPL industry. As a payment method, Apple Pay is highly convenient. But Apple as a credit bank that coincidently also sells hardware and software? Not very likely.

What is the future outlook for BNPL? Where is the industry heading to?

By now, BNPL products have become mainstream payment methods in so many countries that I am looking forward to seeing how they grow further within the next few years. Our company, PAYLA, is the back-end for several large payment providers and retail banks offering BNPL products. It is also good to see BNPL providers investing so much money and effort in grabbing market share - even if it was backed by heavy venture spending. While this will end soon, it won't have a negative impact on BNPL's share of the overall payment mix - BNPL has already been very successful in its traditional markets and will continue to grow there. And as we know from our own business, all large payment providers are further developing their BNPL products.

This interview was first published in Payment Methods Report 2022, the most updated overview of trends and developments in the payment methods space and the innovative technologies that these methods work upon, emerging consumers habits, and strategies on how to win at conversion and retention.

About Roberto Valerio

About PAYLA

PAYLA is a true white-label ‘Buy Now, Pay Later’ service provider for European Payment Service Companies and Financial Institutions. The software platform is a complete turnkey solution covering all aspects of BNPL, including automated risk assessment, debtor management, any level of high-quality customer support and also the full refinancing of the invoice and instalment volume. PAYLA's clients are able to provide fully integrated and white-labelled BNPL products to their merchant customer portfolio with little effort and no risk, generating steady revenues solely based on the merchants transaction volume.