Buy now, worry about it later: the future of BNPL
Buy now, pay later – is there a more apt fintech application for our times than BNPL? What better fit for our current era of instant gratification and gloomy pessimism about the future than buy it now, worry about the cost later.
The popularity of BNPL has boomed in recent years
BNPL offers a lifeline for some and flexibility for others, and there is an argument that it broadens financial inclusion.
Research conducted by Divido in February 2023 suggests that almost three fifths of British consumers (58%) believe point-of-sale (POS) financing can be a good way to help them manage their finances.
Ultimately, though, it is unsecured debt, often doled out without a thought as to whether punters can pay it back. Many BNPL services do not perform formal credit checks or income assessment. Is that sustainable?
Media reports that people are using BNPL to buy essentials such as groceries or non-essentials such as Deliveroo, rather than the latest fast fashion item or indispensable gadget, may say more about our current economic situation than the risks associated with embedded finance.
The Covid-19 pandemic, rising inflation, higher interest rates and the cost-of-living crisis have all played a part in boosting the appeal and use of BNPL.
Similarly, they may also act as brakes on its adoption and utilisation. The pandemic is over, the current murmurings are that inflation has peaked, and discretionary spending has tanked thanks to the UK’s miserly economy.
Meanwhile, the UK government intends to tighten up the rules around the offering of short-term interest-free credit by BNPL providers, which could sooth the naysayers and broaden the appeal of such services.
Follow the money
Adobe Analytics recently released a report that showed £1 in every £8 (12%) spent online in the UK in January 2023 was via BNPL offerings.
BNPL could draw on non-traditional data to broaden financial inclusion
The Adobe Digital Economy Index analyses tens of billions of online transactions from UK consumers and tracks 100 million stock keeping units (SKUs) to identify trends in consumer spending.
The report found that while purchases using BNPL accounted for 12% of online orders in January 2023, up from 10.7% in January 2022, rising energy and food costs have created a more “price-conscious UK consumer”, with £8 billion spent online in January, 1.4% less than the year prior.
Suzanne Steele, vice president and managing director for Adobe in the UK, says that while news from the Bank of England that inflation has probably peaked is good in the mid to long term, “the increased use of BNPL to spread the cost of January purchases shows that consumers are still keeping a close eye on their finances in the short term”.
Looking ahead
Access to more alternative data, perhaps through open banking in the short term or other data points gleaned from a blockchain-powered digital ID database in the medium to long term, will not only open up credit to a wider demographic, but ensure consumers can afford to pay back what they borrow.
Chris Keen, managing director UK and Ireland at AI risk decisioning platform Provenir, says: “Our hope for the industry is that the regulator won’t impose a traditional credit scoring model, which could limit the financial inclusion benefits BNPL providers bring to the table.”
Credit scoring can often have inherent biases, which impacts certain demographics from fairly accessing credit. Keen suggests data could instead be drawn from phone bills, rent and utilities payment information, social media and web presence, travel data and open banking information.
Further consolidation in the space will see firms leverage data and tech stacks hoovered up through strategic mergers and acquisitions to offer more targeted BNPL to consumers within their respective industries, as well as expand into other markets, verticals and industries.
UK fintech unicorn Zopa recently made its first acquisition, snapping up e-commerce credit solutions provider DivideBuy as it looks to deliver “BNPL 2.0”.
The move will enable Zopa users to spread the cost of larger purchases worth between £250 and £30,000. The product will run credit checks and affordability assessments, share data with credit agencies, enable the creation of credit profiles and help customers structure and pay off their debt.
It will also provide instant decisions and combine “fully integrated” consumer journeys with consumer protection and the safeguards of a regulated bank, Zopa says.
DivideBuy CEO Robert Flowers says the company’s tech will “enable Zopa to leverage its core lending capabilities” and “ensure we meet upcoming regulation head-on”.
The ability to spread the cost of larger purchases aligns with data that suggests UK consumers are increasingly turning to BNPL to do just that, with the average order value for online BNPL orders up 18% year-over-year, according to Adobe.
Younger demographics – millennials, Gen Z (and eventually, Alpha) – will drive BNPL expansion and growth thanks to difficulties accessing traditional credit. These demographics also have a more relaxed attitude towards retail and fashion firms utilising embedded finance and an openness to fintech and non-traditional financial and banking services.
Millennials will likely continue to split their purchasing costs
Sameer Pethe, a partner at management consultancy Kearney, says the firm’s research “consistently” shows that millennials and Gen Z can’t get enough of BNPL, “particularly when it is seamlessly integrated into their buying journey”, as it doesn’t really “appear as credit” in the minds of younger consumers.
Regulators are now playing catch-up with the space, subjecting BNPL to affordability checks, data sharing with credit reference agencies, and guidelines on forbearance and collections.
Deko’s head of compliance and risk, Steve Perring, believes the FCA’s proposals “strike a fair balance”.
The regulations will enable customers to make more informed decisions at checkout about the finance options available, enforcing lenders to take steps to assess the sustainability of repayments and giving customers equal protections regardless of the finance option they choose.
“The fact that these credit products are interest-free, does not mean that they are risk-free,” Perring adds.
Divido CEO Todd Latham believes that thanks to the FCA’s regulation, “we are now looking at a future where vulnerable or financially insecure customers will not be accepted for lines of credit they cannot afford to pay back”.
Parting thoughts
There’s certainly a wider discussion to be had around BNPL. Should people be encouraged to spend what they don’t have, often buying what they don’t need? How do efforts to make people’s money go further and spend beyond their means on stuff fit into plans to engender a so-called steady-state economy or hopes for sustainability?
Whichever way you look at it, it seems as though BNPL is here to stay. Much-needed regulation is on its way and the march of innovation will see a wider range of data points broaden access to this type of credit. Certainly, people will continue to buy now and worry about the cost later. That will never change.
