Customers need protection from BNPL’s unintended consequences
Everyone seems to be climbing aboard the buy now, pay later (BNPL) bandwagon, as I discussed in my last blog, Customers are enjoying the new option for spreading out their payments, retailers are seeing positive effects on their sales, and financial service providers are attracting new customers with this convenient product. But the focus has largely been on the moment of purchase, when—in the context of a strong economy—everything has gone smoothly. Let’s take a look at the bigger picture.
What’s going well
BNPL options are making customers feel more empowered to choose how they want to pay for purchases—and the choice is in their hands, rather than the merchant’s. It’s an additional way to access money beyond credit cards and lines of credit.
As online shopping continues to grow, customers are also benefiting from BNPL when they return items. It’s fast and easy for their BNPL balance to be adjusted after a return, giving them access to more credit immediately rather than waiting for chargebacks.
Smaller merchants are happy to have new options for their customers, without paying substantial fees. It’s easier to compete with the big-box stores and chains if they can offer BNPL through a bank or other provider. This is true for both online and physical stores—BNPL came to customers’ attention mainly as an online shopping option, but its presence at in-person checkouts is growing. This expansion could be a great opportunity for banks, since many already have an in-store presence through their point-of-sale machines.
On the surface, and assuming the forecasts of an impending recession are overblown, the future of BNPL looks bright.
What’s not going so well
The post-purchase BNPL experience involves multiple payments and perhaps penalties for late payment or even being unable to pay at all. This is where there is still work to be done. The focus on the moment of purchase needs to extend to managing repayment. In the current environment, the customer’s long-term interests are not adequately protected by BNPL providers.
Because they can delay full payment, customers may be tempted to buy more than they can afford. As they access multiple BNPL offers from retailers and financial services providers, they could find themselves juggling an ever-growing number of monthly payments to different companies. Keeping on top of their debt load and obligations could become difficult, and they may underestimate the total amount of debt they’re taking on. Recent research by Barclays Bank and the debt charity StepChange in the UK found that the average BNPL customer was paying off 4.8 purchases, with 31% saying BNPL purchases had led them into “problem debt.” As both prices and interest rates continue to rise, this problem seems likely to worsen.
This risk of growing and hard-to-track debt, along with the lack of controls over a customer’s total spend, are of significant concern to regulators. They have been left to make difficult decisions about the ground rules that should apply to BNPL, and perhaps even whether it should be allowed at all.
What can banks do?
Banks can help their customers to navigate this new way of purchasing by providing the guidance they need to manage their debt. A bank that can support its customers and show empathy has an opportunity to earn their loyalty and long-term business. Let’s look at some ways that banks can offer their customers a level of service that will make a real difference.
Reduce the complexity
Most of the early movers in BNPL were fintechs and other digital players, not banks. Yet banks are in the best position to offer a complete customer service, because they know their customers’ finances best and can see the bigger picture. They can use this knowledge to make BNPL easier for their customers to manage responsibly.
Making purchases with BNPL is simple, but repayment gets complicated because you pay for each purchase separately—each purchase becomes a micro-loan to be repaid. A customer who has used BNPL several times could have multiple installments to pay each month. Eventually, it gets hard to track how much is left to pay on any given purchase, how many payments are due each month and how much money the customer needs to ensure they don’t fall behind.
Banks can play to their strengths by offering customers a consolidated overview of their BNPL debts on their monthly bank statement. This would reduce a pain point and provide a level of service that other BNPL players simply cannot match. It’s a chance for banks to demonstrate that they truly care about their customers’ overall financial well-being.
A deeper understanding of customers’ financial and emotional circumstances, and the ability to predict and respond to their intent, would go a long way to rebuilding affinity and loyalty.
–Accenture Banking, Top 10 Trends for 2022
Prepare for regulation
Regulators have been very hands-off with BNPL so far, but this situation may not last if it seems like providers are acting unethically by letting their customers take on more debt than they can afford. In the UK, for example, the Financial Conduct Authority is expected to implement regulations by 2024.
When regulators do step in, banks may have an advantage over other players in BNPL, thanks to their long experience as a regulated industry. Since banks already have significant resources allocated to compliance, and robust reporting systems, they will be in a good position to comply.
Banks are also likely to be in a better position to assess the overall risk level of customers, to respond to changes in their financial circumstances, and to set appropriate limits to their total credit. It may be more difficult for other players in the BNPL ecosystem to gather relevant data and assess this big-picture view of the customer’s credit, especially at the moment of purchase. For banks to provide this level of service, they may need to look carefully at how they measure affordability.
In 2020, around 22% of BNPL users said they were likely to make a late payment or incur a late-payment fee in the next 12 months. In 2021, that rose to over 36%.
– The Ascent surveys of American adults, July 2020 and March 2021
The demand for BNPL has grown quickly, and providers have rapidly introduced services to avoid missing out on the trend. How many of them have created a long-term strategy for BNPL? Banks that provide services with empathy and responsibility can build loyalty and trust, even as the market becomes more crowded and competitive.
Banks may need to consider the effects of their BNPL services on their ethical finance strategies. Are they putting the right limits in place to protect both customers and merchants? Are they contributing to an ethical marketplace? Focusing only on short-term profits could put a bank’s reputation at risk, while banks that focus on sustainable business models for BNPL should benefit in the long run.
Banks can implement responsible BNPL services by focusing on customer affordability and risk management. Customers need to be aware of their current debt level to avoid getting into a situation where they cannot afford to make their payments on time. Banks can provide access to money at the moment of purchase, but also help customers to realize when it would be a bad idea to incur additional debt.
If banks manage to put real humanity and empathy behind their services, and not just provide a slick app, customers will take notice and appreciate it.