UK Car Lending

What to expect from the next stage of “Buy now, pay later”

OpinionAlternative loansDigital bankSavings and investment

BNPL is poised to consolidate with more than 170 startups vying for dominance across all segments, writes Rodney Bain of APEXX Global.

Image source: Photo by Monstera

The “buy now, pay later” industry is about to split in two. This bifurcation of BNPL’s business models will increasingly mean that industry participants fall into two camps defined by the level of attention they are capable of demanding.

Currently, BNPL loans currently represent just over 1% of the credit market, with the global market size expected to reach $20.40 billion by 2028.

As the industry continues on its rapid growth trajectory, current and potential market players are watching closely for indications of the form, scope and impact of regulation all of which are expected to arrive in the relatively short term. .

But regulatory intervention is not the only moving element that may determine the future shape of this exciting segment of the credit market. Just as important as the first move of the various regulators will be the strategies chosen by the major players.

Those who lack the high levels of consumer loyalty and active customer bases enjoyed by brands like Klarna and Afterpay are likely to continue serving e-commerce merchants while branching out into in-person consumer channels.

This will put increasing pressure on merchants’ fees and margin as competition intensifies. Key verticals for growth could include opening up new loan streams and stretching lending thresholds to better compete with credit card, personal loan and auto finance products with the consumers they have relationships with. strong relationships.

BNPL’s second group, with stronger consumer relationships, will likely evolve into global financial super apps, leveraging consumer attention, brand recognition and loyalty to capture user spending and the consumption of financial services, including loans, banking, insurance and investments.

Acquiring consumers and the funding they attract provides the bandwidth to innovate and open up to new markets. While this may further disintermediate the relationship between merchants and customers, this will be partially offset by the attractiveness of BNPL payment options for consumers.

For retail banks, BNPL is a feature rather than a product. But the opportunity is clear – increased customer engagement, new revenue lines and protection of existing revenue as card issuance revenue is cannibalized by BNPL spending.

However, banks face many challenges to successfully enter the BNPL space. This explains why the majority of banking activity in the BNPL sector comes from challengers and neo-banks that are better able to act quickly and adapt to rapidly changing market conditions. In the UK, Revolut and Monzo have so far made the biggest moves in the BNPL market.

Although the sector is currently unregulated, with the BNPL increasingly challenging the traditional credit market, regulators are quickly taking stock and working to incorporate the BNPL into their remit.

The speed of industry growth means that the use of BNPL has outpaced consumers’ understanding of the credit products they accept and the potential risks associated with them. These risks become more significant when accompanied by a lack of consumer protection, proper assessments made on behalf of the consumer regarding their ability to secure refunds, and fair treatment in the event of a consumer’s difficulty. .

All of this is necessary to improve the fairness, transparency and integrity of the BNPL market for all.

It is essential that consumers are protected. But it is also important that regulation is proportionate, progressive and structurally appropriate. Regulation should distinguish between types of products and the extent to which they could potentially harm consumers or the credit market at large.

For example, there is a fundamental difference between the low-value, high-frequency loans issued by BNPL and traditional loan products that have remained largely unchanged for decades. A major challenge for regulators will be to introduce non-discriminatory regulation for consumers with thin credit records. It could also be an opportunity to review weaknesses in the existing credit market and broader credit bureau infrastructure that stand to benefit from better data transparency and timeliness.

When used correctly, BNPL has many benefits for consumers, including convenience, efficiency, and customer experience, and they should not be restricted or penalized for using the line of credit.

This is particularly important when it comes to creditworthiness and access to other products such as mortgages and personal loans. Regulation should also seek to ensure that consumers using BNPL responsibly obtain the same benefits for good repayment behavior as with other credit products and can use them for credit building purposes.

When it comes to putting regulation into practice, the UK is well ahead. Australia, New Zealand, Canada and the United States are likely to present key near-term battlegrounds for regulators for BNPL companies and the EU should introduce regulation in member states where overlaps between national and European rules would favor stricter treatment of lenders.

In 2022, we will continue to see the launch of new providers and the consolidation of existing providers. BNPL is a game of scale and consolidation will be a key feature of an industry with over 170 startups vying for dominance across all segments. As regulatory requirements take shape in the UK, and in other markets in due course, there will also be an appetite for an aggregator model to help merchants adapt to different regulatory requirements at the market and state.

Ultimately, the BNPL market faces regulation and consolidation. This is necessary to protect customers and for the industry to grow. But it is essential that this does not come at the expense of customer experience, transparency and innovation.

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