Can Open Banking make BNPL more sustainable?
Buy Now Pay Later (BNPL) and other similar digital credit products are the talk of the town right now. Many traditional financial entities and service providers are trying to add this lucrative quiver to their arc, and many fintechs have been founded in this space. But let’s be honest, it’s a bit of a mess, isn’t it?
After some initial stratospheric assessments and a lot of excitement, it looks like many players in the industry are waking up to the sobering reality. Perhaps providing huge amounts of unsecured credit to (often) younger people (who buy things without any sort of credit check) isn’t a sustainable business model. Some of the biggest fintechs with coffers full of venture capital will overcome their substantial losses and adjust their products, expand their market reach and aim to keep their valuations high. Financial institutions and traditional banks will have to find models that do not lead to huge financial losses and loss of customer confidence.
The impact of this business model on consumers is also remarkable. 30-40% of BNPL clients reported difficulty with repayment (see losses discussed above). And while one of BNPL’s selling points is often its transparent terms, many consumers have been shocked by the hefty late fees they’ve been charged and the dodgy debt collectors their loans have been referred to. Given all of this, it should come as no surprise that the EU is seeking to regulate BNPL. A proposal for a new consumer credit directive has been submitted to the European Parliament and will almost certainly be adopted. This will require providers of BNPL and other currently unregulated lenders to adhere to certain standard lending rules, in particular, to perform some form of credit check before granting a loan.
The use of Open Banking for BNPL providers
At BNPL, getting consumers in has never been a problem. Consumers of all ages are clearly interested in convenient financial products, with low or no interest charges and clear repayment terms. The recent e-commerce boom has made consumers expect quick and easy ways to get what they want, and therein lies the challenge. How can BNPL’s suppliers provide a smooth 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 laws on data collection and protection and often without traditional credit bureaus), we believe there is a consistent and reliable approach: Open Banking.
We provide a solution called WL Credit Insight, which uses Open Banking AIS (Account Information Services) to collect transaction data and use this data to quickly generate credit score and related analytics.
The customer journey is key, especially for an BNPL product. Consumers expect simple and quick travel; with this in mind, we have created a user experience that is easy to integrate into existing digital flows. Once the consumer has provided consent, transaction data is collected using Worldline’s extensive TPP scope. This data is analyzed, categorized and scored. Key risk data such as gambling, chargebacks, existing credit, etc. are flagged, and all of that data is sent back to the lender within seconds.
Access to this type of information has many advantages for BNPL providers:
Open Banking data paints a very accurate picture of a consumer’s finances. Customers who may have been unnecessarily rejected before can now be accepted, as the lender has a clear view of their ability to pay, plus the added security of having confirmed the borrower’s IBAN and account ownership .
BNPL providers can also set spending limits that match the customer’s profile.
As noted earlier, out-of-control debt is soaring, quarterly losses are piling up, and ultimately venture capital’s purse strings are tightening. Consumers who are clearly not in a position to take on debt are easily identified using WL Credit Insight. BNPL providers can avoid losses from customer defaults and avoid sending their customers (and their merchant’s customers) into unaffordable debt. The credit check can be periodically renewed to ensure that existing customers do not accept more than they can afford.
Regulation is coming, and it seems like the sensible thing for existing BNPL providers to do is to recognize this and take proactive steps to deal with these recognized threats.
In order to meet these regulatory requirements, BNPL providers must use relevant and accurate information to assess the financial and economic situation of the consumer. Open Banking enables providers to meet this requirement in a fast digital user experience. Credit bureaus with relevant information on a large part of the population are not very 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 credit. The only question is who will be there to provide it? We believe that fintechs, banks, and other lenders could all have longevity in this space if they adopt an ethical customer-centric approach that also improves their business model.
To find out more, download our product sheet ‘The future of Open Banking and credit: fairer, faster, safer’.
About Gavin Copeland
Gavin is Product Manager at Worldline, specializing in Open Banking. Gavin first joined Worldline as a software development project manager, working on international projects for a variety of corporate clients. 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 that help Worldline customers address these topics.
With over 45 years of experience in payments, Worldline connects and secures the transactions that are part of our daily lives. Covering the entire payments value chain, our technology experts create and operate digital solutions to drive business across all industries, including banking, retail, transportation and government, through transformative technologies and deep knowledge. Best in class user experience is our mandate.