Buy Now Pay Later (BNPL) and other similar digital credit products are the talk of the (finance) town right now. Many traditional financial entities and service providers are trying to add this lucrative quiver to their bows, and numerous fintechs have been founded in this space. But let's be honest, it's all a bit of a mess, isn’t it?
After some initial stratospheric valuations and much excitement, it seems many in the industry are waking up to the sobering reality. Perhaps, providing huge amounts of unsecured credit to (often) younger people (who are buying things without any sort of credit checking) is not a sustainable business model. Some of the larger fintechs with vaults full of venture capital will ride out their substantial losses and tweak their products, expand their market reach and aim to keep their valuations high. Traditional financial institutions and banks will need to find models that don’t lead to huge financial losses and losses of customer trust.
The impact of this business model on consumers is also noteworthy. 30-40% of BNPL customers have reported difficulties in repayments (see the losses mentioned above). And while one of BNPL’s selling points is often its transparent terms, many consumers have been shocked by the sizable late fees they have been charged, and the dubious debt collectors to which their loans have been referred. Given all this, it should not come as a big surprise that the EU is looking to regulate BNPL. A proposal for a new consumer credit directive has been submitted to the European Parliament and will almost certainly pass. This will require BNPL providers and other currently unregulated lenders to adhere to some standard lending rules, in particular, to conduct some form of credit check before issuing a loan.
The use of Open Banking for BNPL providers In BNPL, getting consumers in the door has never been the problem. Consumers of all ages are clearly interested in financial products that offer convenience, low or no interest fees, and clear repayment terms. The recent boom in ecommerce has led consumers to expect simple and fast ways to get what they want, and therein lies the challenge. How can BNPL providers offer a slick customer journey, have a viable business model, not drag consumers into unaffordable debt, and comply with regulatory requirements?
In the mottled and complex landscape of the EU (with varying data collection and protection laws and often without traditional credit bureaus), we believe that there is one consistent, reliable approach: Open Banking.
We provide a solution named WL Credit Insight, which makes use of Open Banking AIS (Account Information Services) to gather transaction data and use this data to quickly generate a credit score and related analytics.
The customer journey is the key, especially for a BNPL product. Consumers expect a simple, fast journey; with this in mind, we have created a user experience that is easy to integrate into existing digital flows. Once the consumer has provided their consent, the transaction data is gathered using Worldline's extensive TPP reach. This data is analysed, categorised, and scored. Key risk data such as gambling, payment rejections, existing credit, etc. are flagged, and all this data is returned to the lender within seconds.
Access to this kind of information has many advantages for BNPL providers:
High acceptance Open Banking data paints a highly accurate picture of a consumer's finances. Customers who may have been turned away unnecessarily before can now be accepted, as the lender has a clear view of their ability-to-pay, as well as the added security of having confirmed the borrowers IBAN and account ownership.
BNPL providers can also set spending limits that match the customer's profile.
Avoid defaults As discussed earlier, unchecked debt quickly spirals, quarterly losses build, and eventually VC purse strings tighten. Consumers who are clearly not able to take on debt are easily identified using WL Credit Insight. BNPL providers can avoid losses from customer defaults and avoid sending their clients (and their merchant's clients) into unaffordable debt. The credit check can be periodically renewed to ensure that existing clients are not taking on more than they can afford.
Regulation Regulation is coming, and it seems the sensible thing for existing BNPL providers to do is to acknowledge this and take some proactive steps to address these acknowledged threats.
In order to meet these regulatory requirements, BNPL providers must use relevant and accurate information to assess the consumer's financial and economic circumstances. Open Banking allows providers to meet that requirement in a fast, digital user experience. Credit bureaus with relevant information on a large portion of the population are not widely active in the EU, and even traditional bureaus have invested in Open Banking given the wealth of information available.
BNPL is not a new concept and will certainly play a role in the future of lending. The only question is who will be around to provide it? We believe fintechs, banks, and other lenders could all have longevity in this space if they embrace a customer-centric, ethical approach that also improves their business model.
Find out more – download our product sheet ‘The future of Open Banking and credit: fairer, faster, secure’.
About Gavin Copeland Gavin is a Product Manager at Worldline, focused on Open Banking. Gavin initially joined Worldline as a software development Project Manager, working on international projects for a variety of enterprise customers. Interested in innovation, new forms of payment and financial inclusion Gavin now works for Digital services where he develops Digital Banking and Open Banking products which help Worldline’s customers tackle these subjects.
About Worldline With more than 45 years of experience in the payments business, Worldline connects and secures transactions that form parts of our daily lives. Covering the entire payment value chain, our technology experts create and operate digital solutions to boost the business of companies across all sectors including banking, retail, transport, and government, through transformative technologies and in-depth knowledge. Best in class user experience is our mandate.
Every day we send out a free e-mail with the most important headlines of the last 24 hours.
Subscribe now