Can open banking make BNPL more sustainable?
As a unique solution for offering financing with very low friction, buy now, pay later (BNPL) was born to meet the tough requirements of the retail space.
Open banking could reduce oversight and increase accountability in BNPL
It did so by using technology to remove bottlenecks at every step of the financing process. With no interest rates, minimal sign-up steps and an emphasis on user experience, the service was optimised for the highest conversion rates.
Recently, BNPL has started to make the news, with more and more users in the US and UK falling behind on their payments. This has, unsurprisingly, created a growing amount of negative sentiment around the industry.
In every credit product’s lifetime there is a moment when the lack of regulation and lack of protective measures (e.g. credit checks) for vulnerable customers results in criticism.
This happened to credit cards and payday loans, then micro-loans, and now it’s happening to BNPL. As the product matures, BNPL must find ways to provide customer safety.
The limits of BNPL
BNPL has been criticised in the past for the lack of clarity involved when presenting terms and conditions. Combined with the potential lack of financial knowledge of customers, there is a huge risk for problems to occur.
BNPL may involve interest-free financing, but when it comes to late payments, there are fees that add up fast and can easily get out of control. It is no surprise then how easy it is for customers to fall into a BNPL debt hole.
With one in three BNPL users in the US and one in ten users in the UK currently behind on their payments, the risk has become a reality. With this kind of risk, an extra layer of control must be added to protect consumers.
Open banking for sustainable credit products
Open banking is able to fill in the gaps needed to reduce oversight and increase the degree of accountability in BNPL. Lenders have been using open banking to verify regular income and active liabilities.
Among BNPL providers, global brands like Mastercard and challengers like Viabill have been vocal about the benefits of using open banking for more thorough credit assessment.
Open banking allows for data-rich insights into creditworthiness that makes defaults easier than ever to detect. With the same mechanisms, open banking ensures financial inclusion by helping to increase the creditworthiness of all customers, including the less well-off communities for whom access to financial instruments and micro-lending can be one of the keys to pulling them out of poverty.
As a result, open banking increases accountability of BNPL companies by providing all the necessary tools and data, ensuring that there are no excuses when it comes to protecting customers.
Open banking and verification
Any verification process creates additional friction, and BNPL dislikes friction more than anyone. Compared to previous credit check methods of providing payslips and bank statements, open banking takes more friction away than it adds.
Just like we got used to credit checks or verifying our email address when signing up to any new service, I’d argue we will get used to using open banking for income verification checks when we’re splitting payments on larger purchases.
For BNPL companies, instead of looking at verification as ‘just another thing that kills conversion’, it should be embraced and thought of as a way to create a sustainable credit product.
In Europe and the UK, open banking regulation has ensured that financial data sharing can happen easily. With the direct benefits and ease of access, open banking could just be the missing piece to help BNPL mature into its next phase.
