The Evolution of Buy Now, Pay Later in eCommerce: Part 2

by | Oct 6, 2022

In Part 1, we talked about the rapid growth of Buy Now, Pay Later (BNPL) and discussed its expansion across industries. In Part 2, we will consider how impending regulation may shake up the short-term lending space.


Impending Regulation of BNPL

While consumers love the flexibility and convenience of Buy Now, Pay Later financing, the industry grew rapidly without much regulatory oversight, and there are increasing concerns that BNPL providers are lending irresponsibly. Because BNPL services are not required to perform thorough credit checks, critics suggest these lending practices can contribute to spiraling debt accumulation and financial hardship for consumers. Users may be attracted to the instantaneous nature of BNPL loans as a convenient new technology feature, but fail to understand they are entering a credit agreement that could impact their credit scores if payments are missed.

In response to these concerns, many countries are ramping up calls for regulatory action. In 2021, the UK Financial Conduct Authority (FCA) conducted a review which found BNPL poses significant potential for customer harm. In response to the review, the FCA is planning a regulatory framework around BNPL in the UK, and these new laws are expected in 2023. Similarly, Australia and the EU are both taking steps to bring BNPL financing under the control of laws that regulate credit cards and loans. While the US has echoed calls for better regulation around BNPL, the Consumer Financial Protection Bureau (CFPB) has been slow to take initial steps. In December 2021, the CFPB began its own inquiry into the risks of BNPL. The US may eventually join other countries in implementing more regulation around BNPL, but the CFPB director has signaled it’s not a top priority.


New Possibilities with Open Banking

Impending regulation will have a big impact on the future of innovation in the BNPL industry. Since most BNPL providers only perform soft credit checks, regulatory bodies are calling for full credit risk assessments to protect consumers from getting in over their heads. Because the primary draw for BNPL is the instantaneous nature of its POS finance offerings, providers must find a risk assessment solution that retains the same frictionless experience for the customer.

Open banking has the potential to transform how credit checks are done, opening doors for BNPL lenders in the face of looming regulation. Open banking has ushered in a new era for fintech by using APIs to integrate data seamlessly and securely between apps and services. Using open banking APIs, BNPL providers could have instant access to customer data, allowing them to perform full credit risk checks and predictive analytics in real-time. This would allow BNPL platforms to practice more responsible lending without sacrificing the smooth customer experience that POS lending services have innovated.


Recent Market Downturns for BNPL

The BNPL industry exploded during a time of low interest rates, and many providers experienced skyrocketing valuations in a very short time frame. In 2021, BNPL giants Affirm and Klarna were valued at $47 billion and $46 billion respectively. However, recent interest rate hikes combined with inflation and a volatile market have “cast a shadow” over the BNPL sector. Affirm has been hit especially hard recently, with shares dropping more than 90% this year. Slow growth post-pandemic has valuations falling for Afterpay and Klarna as well.

Even though BNPL providers are currently facing trouble due to rapid growth and overvaluations, the short-term financing industry is undoubtedly here to stay. Globally, consumers are moving away from cash and traditional banks in favor of more convenient and personalized finance offerings. To remain relevant in a competitive space, BNPL providers must expand their reach beyond retail point-of-sale and prepare for regulations to disrupt their business models. While BNPL startups are currently winning the POS financing race, they must integrate the right technologies to comply with regulatory oversight while retaining the same convenience, or they may risk losing market share to banks entering the POS financing market. Since traditional banks have extensive experience with regulation and compliance, banks may have more of an advantage once regulatory laws come into effect. 

CHECK IT OUT: Certegy is one of the leaders in digital payment processing in the United States. Sourcetoad expanded Certegy’s functionality by building an API and payments interface for the company, including a Buy Now, Pay Later feature.

When investing in technology, it’s crucial for financial firms to have a partner with proven experience navigating regulatory environments. In a rapidly-evolving sector like fintech, it’s also important for firms to have solutions that anticipate change. At Sourcetoad, we’ve been building software applications for nearly 15 years, and we understand how to work within evolving regulatory requirements while creating effective, forward-thinking solutions that work with existing core systems. Whether you’re looking to improve process efficiency or introduce a new customer-facing product or service, our team has years of experience developing, implementing, and maintaining successful projects like yours.

When you’re ready to begin developing custom finance software for your organization, reach out to schedule a 30- or 60-minute call. We’d love to introduce ourselves, learn about your needs, and hear how we can help turn your idea into reality.


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