The Buy Now Pay Later (BNPL) industry is at a pivotal stage in its evolution. There is little doubt that the model will continue to build momentum in the market. Still, today’s rapid growth is attracting new competitors, forcing changes in financial models, and increasing regulatory scrutiny. As a result, BNPL firms navigating this changing landscape need to ensure their focus on capturing market share today doesn’t introduce unnecessary risks that jeopardize long-term profitability.
The Price of Growth
According to an August 2021 report from Grand View Research, the global BNPL market is expected to reach $20.4 billion by 2028, with a compound annual growth rate of 22.4%. That’s a strong testament to the value provided by BNPL services to consumers and merchants alike. However, it also creates incredible opportunities—and new challenges—for BNPL providers.
The most obvious challenge is the increased competition growth inevitably attracts, including, in this case, major banks and credit card companies who seek to leverage their strong merchant relationships to extend into BNPL. A larger competitive field could not only dilute market share for established providers but also drive down merchant subsidies, causing some BNPL firms to proactively introduce new and largely untested consumer-based offerings that make them less reliant on merchant relationships.
Regulatory uncertainty also hovers over the market. In the U.K., BNPL regulations are a priority, and firms are waiting to see how that regulation will look. The U.S. is a step behind on this front, but a July 6 blog post by the Consumer Financial Protection Bureau (CFPB) shows the payment model is on their radar. The post, which includes the caution, “BNPL companies don’t offer the same dispute protections as credit cards,” may signal the direction U.S. regulators are heading. Whatever form it takes, increased regulation now seems inevitable.
While most in the industry aren’t averse to reasonable regulation, there is concern that the CFPB may underestimate consumers’ understanding of BNPL services and impose regulations that do little more than create friction at the point of sale. Can firms take steps today to mitigate the future disruption regulation could create?
Finally, with credit markets particularly strong and the focus of BNPL firms on capturing market share, there has been a tendency to adopt more aggressive underwriting practices. This introduces future recovery risks that many BNPL firms are willing to accept as the price of growth. Still, firms should also consider processes that minimize their exposure to bad debt if the economy dips into recession in the next several years.
Closing Gaps that Increase Risk
As BNPL firms position for success in an increasingly competitive market, there are two areas of focus that can help them minimize future risks and position for long-term profitability: recovery and compliance.
Effective recovery requires achieving the right balance between protecting customer relationships and maximizing profitability. Push too hard on late payers and risk jeopardizing future relationships and incurring potential brand damage as heavy-handed tactics are shared across social media. On the other hand, they become too passive and leave money on the table.
Today, most firms lack the sophistication in their recovery processes to employ the customer-friendly, non-telephony tactics required to find the sweet spot between those two approaches, resulting in an overreliance on difficult-to-deal-with and profitability-draining collection services.
The other area that requires increased focus today is compliance. Compliance officers play a critical role in ensuring their firms comply with current regulations, but that can leave them little time to prepare their organization for future regulatory change. Payment processing and verification solutions that have been proven in credit card processing can help ensure BNPL services remain compliant even if regulators apply a framework for BNPL services similar to what exists for credit cards.
The Value of an Enterprise Solution
At Payliance, we help BNPL firms navigate the changes occurring in the market today and maximize their profitability through a suite of account verification, repayment processing, and recovery solutions backed by a team of industry experts who work with your existing systems to accelerate repayment processing.
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