How can Open Banking enable Buy Now, Pay Later (BNPL)?
Buy Now, Pay Later (BNPL) has seen explosive growth and remarkable adoption in recent years. In the UK, the use of BNPL transactions quadrupled in 2020 to £2.7bn – before doubling again in 2021 to £5.7bn. Over 12 million people now use BNPL services, with a survey conducted in 2021 indicating that 62% of BNPL users believe it will replace their credit cards.
Yet despite its astonishing performance, the BNPL sector has remained largely unregulated. In January 2022, the UK Treasury closed a consultation which called on industry experts to share “their views on creating a proportionate approach” to the regulation of BNPL. The government then set out a plan to introduce new regulations in June 2022, when it announced that lenders would be required to carry out affordability checks and change financial promotion rules to ensure that Buy-Now advertisements Pay-Later are “fair, clear and not”. misleading’. In addition, lenders offering BNPL must now be approved by the Financial Conduct Authority (FCA) and consumers have the right to lodge complaints with the Financial Ombudsman Service (FOS).
The regulations are designed to reduce the “risk of harm to consumers” and “will protect millions of people”. But will they hurt or help the broader financial services industry? What role can Open Banking play in the development of BNPL and how can merchants benefit from the popularity of this new product? To answer these questions and more, Open Banking Excellence (OBE) brought together a panel of industry experts around a virtual campfire moderated by Oana Ifrim, Editor-in-Chief of Payers.
A lender’s perspective
Three global players dominate BNPL: Klarna, affirm and After-payment (known as Clearpay in the UK and EU). Iana Vidal, Director of Public Policy and Regulatory Affairs, UK and EU, for Clearpay, said the first BNPL services were created to meet a growing demand from young people for flexible payment options.
“There was concern and anxiety about credit cards, revolving debt and hidden fees and commissions, especially after the global financial crisis,” Iana said. “BNPL was born out of the idea that people would want to spread out payments over a short period of time to smooth out those purchases and budget responsibly.”
There has been a demographic shift among BNPL clients, Iana continued. Gen Z and Millennials have been the “pioneers” of BNPL, but their dominance is changing, with the average age of a BNPL client now being 35 and older generations soon becoming the “next wave.” of adopters”, representing the client category.
The future of regulation
In the UK, consumer credit is regulated by the Consumer Credit Act – which was passed long ago in 1974. Many BNPL products are not covered by the law and are therefore unregulated. When the Treasury announces new regulations, it will draw on the recommendations of its consultation and last year’s Woolard review, which sets out “how regulation can better support a healthy market for unsecured loans”.
Joanne Owens, Partner at Eversheds Sutherland, said: “We are now awaiting comments from the government on the consultation. Essentially, the aim is to move BNPL into the regulated credit space so that the FCA exercises regulatory oversight over lenders, which should also be licensed. There will be a number of business conduct requirements that will therefore apply to the product.
The new regulations are likely to address concerns about consumer protection and ensure clients cannot sign up for BNPL services they cannot afford.
Faith Reynoldsa Non-Executive Director at Fair4All Finance and former non-executive director of the Payment systems regulator and Independent Consumer Representative for the Open Banking Implementing Entity (OBIE), said: ‘Fair4All Finance has developed an Affordable Credit Code, and it would be helpful for businesses to consider how close they are to its recommendations. What is their assessment of affordability? What support do they offer and how do they respond when people need help with repayments? This market has a lot of work to do to mitigate risk, especially in a cost of living crisis that can mean customers are straining.
The rise of B2B BNPL
We often hear about BNPL in a consumer context, with conversations focusing on issues such as debt and financial inclusion. However, our panelists cautioned that it is essential for companies to drive the responsible development of BNPL to benefit from the value it offers and lay the foundations for sustainable growth.
Misa Zivic, CEO and co-founder of LeanPay, said: “For the merchant, it is important that the BNPL operators help him to increase his average ticket amount in order to increase the conversion. The merchant should choose a partner that has responsible lending practices. For all great merchants, it’s important to have a reputable partner that drives sustainable growth. We also need proper customer reviews. It’s the only way forward that helps consumers and enables merchants to grow.
Mikael Kylatie, Lendiron Group CEOp, shared insights from his company’s data, revealing one of BNPL’s biggest trends: the growth in B2B usage.
“E-commerce has grown rapidly due to the pandemic,” he said. “BPL and other flexible payment methods have also grown steadily. Our data shows that demand has stabilized between the different price categories. People also use BNPL for lower price categories. BNPL for B2B customers also exploded.
Activate BNPL with Open Banking
Open Banking is already described as the solution to the problem of customer assessment. When consumers choose to share their data, lenders can access their real-time credit history to get a picture of their finances at the time of purchase.
James Varga, Founder and CEO of DirectID, explained: “When BNPL is used at checkout, there is a risk at this stage of the transaction. Affordability, responsible lending, and understanding a person’s financial hardship or financial well-being are key. I find it hard to see any other way to solve this problem other than Open Banking, as it is a real-time environment. With the shift from traditional credit products like credit cards to BNPL proposals, the traditional credit bureau data we have used for a long time simply no longer applies.
In addition to providing real-time information on affordability, Open Banking can also identify BNPL customers and help combat fraud.
Ed Brandler is Co-founder and CCO of Two, an online B2B invoicing plugin for merchants who want to offer payment terms to their business customers. He explained: “Open Banking can be used as a proxy for digital identification and allow customers to authenticate to their bank account. It also allows lenders to instantly offer credit to businesses that have no credit history or record. You may be a well-capitalized, cash-rich business, but since you haven’t filed reports, you’re too young and new to get credit. Companies that allow lenders to view their bank statements will benefit from an instant credit decision.
Many other ideas, information and data points were shared during the campfire, which you can watch for free on the OBE website.
You can register now for the next OBE Campfire. It is called ‘Security & Fraud: Does Open Banking create new challenges?‘, will take place on June 16 and will explore the challenges of the financial sector as the Open Banking ecosystem develops.
About Helene Child
Helen is the Founder of Open Banking Excellence (OBE), the world’s premier community of Open Banking and Open Finance pioneers across all financial services, including banking, fintech, BigTech and d other organizations in the sector.