Buy Now, Pay Later (BNPL), an old method of payment, is now very popular. BNPL fintechs are still learning the ropes of traditional banking infrastructure and could be in trouble.
FIS, one of the many payment processors, has recently estimated that BNPL is a $100 billion industry or 2.1% global e-commerce transactions. Marqeta, another processor says that BNPL transactions have increased 350% on its platform this year.
The BNPL format's success can be attributed to its ability to provide merchants with a lift at checkout, as well as the convenience it affords consumers who want to avoid debit card fees and interest payments. BNPL was used for at least 91% consumer loans in California last year.
BNPL providers can reduce third-party merchant risk by switching to modern architecture in loan management and servicing.
Klarna, one the largest BNPL providers, claims that shoppers who have the option to pay in four interest-free installments for their purchases see an increase of up to 45% in order value at checkout. BNPL is so much more convenient than traditional installment loans that consumers are worried it will encourage people to take on more debt.
The economic downturn could cause severe financial losses for BNPL providers. Fitch Ratings, one the Big Three U.S credit rating agencies, published a report in the summer describing the performance of BNPL debt. It stated that nearly one-third of respondents (31%), had been late in paying BNPL payments or incurred a penalty.
The other side of BNPL does not include consumer credit risk. BNPL providers claim they can manage this risk with data-driven, non-traditional underwriting. BNPL providers are also exposed to double risk from merchants.
With the passage of Dodd-Frank Wall Street Reform and Consumer Protection Act 2010, three-sided loans (in which a lender relies upon a merchant as a reseller) became the focus of regulatory scrutiny.
Many things were accomplished by Dodd-Frank. One of the most important provisions of Dodd-Frank was the creation of the Consumer Financial Protection Bureau, which has the power to take action against any consumer financial service provider that engages in unfair, deceptive or abusive practices in relation to any transaction with a consumer regarding a consumer product or service.