Understanding Compliance Opportunities and Challenges in BNPL

A McKinsey survey conducted last year found that about 60 percent of consumers were likely to use point-of-sale financing over the next six to 12 months. That’s a remarkable number for what was once considered a relatively small niche of the consumer financing market. It is also an indication of just how influential Buy Now Pay Later (BNPL) services have been on consumer preferences and behaviors.

The growth in BNPL has been driven primarily by the rise of Pay-in-4 services. In fact, Pay-in-4 and BNPL have become practically synonymous in some quarters. Pay-in-4 has not only attracted the lion’s share of the media attention but also major investments. As this model continues to grow, we are likely to see consolidation with the largest providers leveraging their scale to strengthen relationships with merchants and consumers to create barriers to entry for new providers.

But it’s important to recognize that the BNPL market is broader than Pay-in-4. It encompasses POS financing, rent-to-own, and vertically focused services, all of which can provide similar benefits as Pay-in-4 to consumers and merchants while offering the extended installment terms that enable the use of the model with higher-ticket items.

As a result, these segments are benefitting from the growing consumer preference for BNPL services while representing a better opportunity for midsize providers to gain market share. They generally have smaller, easier-to-target merchant communities, allowing more focused acquisition strategies. Mid-size providers can also tailor their solutions to specific vertical industries or retailers to establish a presence and create differentiation.

However, even within these segments, the rising tide created by BNPL will almost certainly attract more competition. In the case of the POS financing market, that competition is likely to come at least in part from banks who are concerned about the impact of BNPL on credit card usage and are seeking their own share of this growing market. If they take the BNPL threat seriously, banks have the resources and systems to become serious players in these segments.

Increased competition has already had an influence on underwriting practices in BNPL markets. The market today has been characterized as a “land grab” as providers focus on capturing market share. That has led to aggressive underwriting practices being paired with passive recovery processes. In some cases, recovery has become an afterthought as providers prioritize customer acquisition and market share over the risks of future defaults.

Customer acquisition certainly needs to be the focus of providers seeking to capture share in a highly competitive market, but future risks can’t be ignored. What’s more, with the sophisticated, technology-enabled recovery processes available today providers have the ability to reduce risk without compromising growth. Putting those processes in place now can not only increase current recovery rates but also minimize or eliminate dependence on collection services in the future.

The surging use of BNPL services is also attracting increased scrutiny from regulators. In the U.S., BNPL currently occupies a regulatory gray area, but regulators have signaled they are taking a closer look at the market, and sustained growth will only increase scrutiny. The Consumer Financial Protection Bureau (CFPB) issued a series of orders to five BNPL companies. In addition to refining recovery processes, BNPL providers must be prepared to match banks’ ability to adapt to regulatory change to thrive in a more tightly regulated future.

For mid-size providers to succeed against established providers and banks they must match the sophistication of these larger competitors while exhibiting greater agility in meeting consumer and merchant requirements. Their ability to achieve that balance will depend, to a large degree, on their technology systems. Outdated processing, verification, and recovery systems will simply prove incapable of supporting the speed and differentiation successful BNPL providers require. Payliance offers a suite of BNPL solutions that can be tailored to your technology systems and business needs. To learn more about how we can help your organization capitalize on the growth in BNPL, contact our payments experts to learn more.