New BNPL regulations will transform the space for fintechs

With record high inflation and a recession in the UK, the current economic climate will undoubtedly worsen over the coming months. As cash and disposable income tighten, we can expect to see more people turning to non-bank loans as a means of alternative finance, with Buy Now Pay Later (BNPL) models expected to feature prominently.

Unlike other traditional lending methods, BNPL remains unregulated by the FCA as of 2022, meaning consumers lack the protection of the Consumer Credit Act and access to relevant support from the Ombudsman. Arguably, BNPL has made it easier to create problem debt, with research showing that a third of UK BNPL users are unable to manage payments under their plan. Although the UK is likely to be at the forefront of new regulations recommended by the FCA not until mid-2023, it appears that it will be too late to address the financial problems facing consumers today. It is clear that more can be done to warn against the revolving door of debt linked to BNPL.

Beware of the pitfalls

BNPL skyrocketed in popularity due to its convenience, lack of interest and easy approval process. However, the hidden risks that come with it, from declining credit scores to debt accumulation, are causing more harm than good to consumers who are vulnerable and feeling more than just a pinch.

Many BNPL users want their usage to contribute to their credit score, which is not a service currently offered by BNPL providers. In fact, late payments can hurt your credit score, with fees often much higher than credit cards. Consumers who finance purchases with additional financing, such as credit cards, face an even higher risk of debt. Not only will this negatively impact younger BNPL users who are less financially literate, but a general lack of BNPL regulation could potentially lead to even more challenging outcomes for society, including mental health and domestic problems.

Be prepared for increased regulatory focus

No one should be caught off guard when the regulation becomes concrete, especially financial institutions and BNPL suppliers. The banks have a responsibility to identify customers at risk and support them with appropriate measures. Consolidation of credit lines should be recommended as it allows consumers to turn debt spiral into manageable loans while avoiding the need to borrow more from a wider pool of BNPL providers.

BNPL suppliers are committed to delivering on the growth commitments made to investors, while ensuring that maintaining operational stability does not negatively impact the customer experience, which they must now put at the center in the face of increased regulatory scrutiny.

Promoting economic resilience is an imperative

Ahead of new regulations, banks also have an opportunity to promote financial resilience to improve the financial health of their valued customers. With open bank-enabled solutions, they can provide insight to customers who want to monitor and consolidate their spending.

The educational aspect is equally important and necessary to avoid exacerbating an already fragile cost of living crisis. Prioritizing financial education at the school level is one approach, given that 50% of Gen Z are BNPL users. Not to mention starter bank accounts, debit and credit cards and investment programs for Gen Alpha are becoming increasingly popular. By placing the burden of accessibility and transparency on the banks, we ensure that customers receive tailored, personal support and advice about their finances, which in turn increases financial literacy.

BNPL suppliers must also ensure that their collection process empathetically engages with customers navigating financial difficulties. This can be done by data-driven segmentation and gathering insights from data, technology and AI to adapt to BNPL users’ specific communication preferences and chosen payment methods.

Turn on gamification

Apart from conventional recourse methods, banks can use gamification in the form of credit comparison tools and in-app rewards to encourage better money management. This can help customers reduce debt and begin to improve their credit rating, and in turn provide access to appropriate credit products, potentially including BNPL.

With the rise of neobanks like Revolut and Monzo, engaging gamification is a logical next step to help consumers better understand their finances. Not only would this engage younger consumers, typically digital natives and more averse to traditional credit, but it would increase financial literacy and improve financial health across the board. A balance must be struck to ensure that apps remain fun and engaging without undermining the authority of the provider.

BNPL providers, such as Klarna and Clearpay, will remain a ubiquitous presence on the payments side, from online stores to food delivery apps. Short-term loans like BNPL have exposed consumers to quick and easy credit by removing the barrier of upfront payments and offering instant gratification. BNPL schemes may be particularly appealing as consumers cope with rising living costs, but there is no doubt that it increases individual risk as they borrow beyond their means without adequate financial advice and regulation.

About the author: Melba Montague is head of banking and capital markets for Genpact.