Buy Now Pay Later Growth Presents Challenges

According to research firm Technavio,  the “Buy Now Pay Later” (BNPL) market is expected to grow by  $41.83 billion from 2021 to 2026. In addition, the growth momentum of the market is expected to accelerate at a CAGR of 29.36% during this period.

Not surprisingly, Technavio attributes this explosive growth to the increasing adoption of online payment methods, as well as the continuing evolution of consumer preference towards convenience.

However, as with any rapidly growing industry, it does not come without its hurdles.  At the recent Money 20/20 conference, Dan Van Dyke, VP of Financial Services at Insider Intelligence, cautioned that this growth has put BNPL providers in the “eye of the perfect storm” due to a number of factors, including:

  • Increased Regulation: The Consumer Financial Protection Bureau (CFPB) recently issued a press release highlighting its efforts to ensure BNPL lenders are held to the same standards and regulations as credit card lenders.
  • Rising Delinquencies: One of the CFPB’s primary concerns about the BNPL market is “inadequate due diligence on a consumer to verify the borrower’s current liabilities.” This concern is likely to remain at the forefront as Q2 2022 saw many BNPL providers show rising delinquencies as the economy continues to show signs of a downturn.

In our view, these challenges are to be expected in such a vibrant industry, and we remain very bullish about its future. As is often the case, these challenges and increased attention should serve as a reminder to have solid originations, collections, and compliance functions that are ready to adapt to increased demand and regulatory oversight.

BNPL lenders should take queues from the CFPB and focus on:

Lending Risk: One of the primary regulatory concerns related to BNPL is that consumers end up taking on several loans within a short time frame, oftentimes with multiple different lenders. Most BNPL lenders do not share data, leading to inadequate due diligence on a consumer to verify the borrower’s current liabilities.

This is backed up by Harvard’s Working Knowledge blog, which analyzed 3.79 million loans by 1.88 million borrowers who turn to alternative lending sources. Their analysis revealed that consumers who turn to these sources are more likely to spend beyond their means, sink further into debt, and ultimately default more often than people with similar credit profiles borrowing from traditional banks. Fintech and other alternative lenders have been lauded for transforming the underwriting process by leveraging big data, AI, and Machine Learning for a more efficient process.  However, it is crucial to continue monitoring customer profiles and have an action plan and a qualified partner in place to address delinquencies before they become defaults.

Financial Education: To address the concerns about borrowers taking on more than they can manage, providing financial education to potential borrowers is a good starting point.  For example, The National Credit Union Administration reports that credit unions with financial education offerings have a credit card delinquency ratio of 1.05%, a full 40 basis points below credit unions without.

We believe this is relevant to any lending category and can be especially powerful with BNPL borrowers.  Whether it is educating a customer about the true cost and credit impacts of missing a single payment, working with them on determining how much they can reasonably afford or helping customers work through a one-time financial emergency, arming customers with this information from day one will go a long way towards the health of a portfolio.

Collections: With recent increases in delinquencies, it’s likely that BNPL lenders are having to spend more time on collections strategy than they have before.  A strategy that is built on regular and proactive communication, understanding and empathy, positive communication, as well as problem-solving with borrowers will yield far greater results than a knee-jerk and hard-handed approach that will turn customers away.

Compliance: Like it or not, BNPL lenders are about to be faced with increased regulation.  Compliance regulations for BNPLs were understandably unclear and looser in the industry’s infancy. However, lenders should prepare for the CFPBs announcement that they will be held to the same standards as credit card companies.   Now is the time to ensure you have the right servicing process/partner in place with the skills and experience to navigate the ever-changing and complex regulatory compliance landscape.

Ready to Invest in Real Experience to meet these BNPL challenges head-on to create opportunities for your portfolio?  We’d love to talk at sales@servicingsolutions.com