BNPL (buy now, pay later) is an ancient method of payment that has resurfaced in a large manner. In addition, it might spell difficulty for BNPL fintechs that are still learning their way around the lending industry and the pitfalls of traditional banking infrastructure. According to FIS, one of the numerous payment processors, the BNPL business is worth $100 billion, or 2.1 percent of worldwide e-commerce transactions. Another processor, Marqeta, claims that BNPL transactions on its platform have surged 350% this year.
The BNPL format’s popularity has been linked to the convenience it affords consumers wishing to avoid interest payments and debit card fees, as well as the boost it provides retailers at checkout. In California, at least 91 percent of consumer loans were BNPL last year. According to Klarna, one of the leading BNPL providers, giving customers the option to pay for their goods in four interest-free installments improves the average order value at the checkout by up to 45 percent. Consumer advocates worry that because BNPL is so simple compared to traditional installment loans, it encourages consumers to take on more debt than they can handle.
If this happens, BNPL providers might be severely harmed during a downturn. Fitch Ratings, one of the Big Three credit rating agencies in the United States, labeled the performance of BNPL debt as “opaque” in a study released this summer. According to the data, nearly one-third of respondents (31%) had been late with a BNPL payment or had charged a late fee.
The other side of BNPL, however, is not merely consumer credit risk, which BNPL providers claim to be able to control through non-traditional, data-driven underwriting. On the merchant side, BNPL suppliers face a double whammy of risk. With the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Serve in 2010, three-sided loans, in which a lender depends on a merchant to act as a reseller, became a target of regulatory scrutiny.
Dodd-Frank accomplished a lot. Creating a Consumer Financial Protection Bureau, which has the power to prosecute consumer financial products or service providers who “engage in any unjust, fraudulent, or abusive act or practice of service, or offer a consumer financial product or service,” most notably Was one of the provisions.