Following an explosion of buy now, pay later (BNPL) use in the past few years, transaction volumes are expected to hit $680 billion worldwide by 2025.
In the United Kingdom, for example, the use of the service nearly quadrupled in 2020 to £2.7 billion (about $3.6 billion) of transactions, according to data from the Financial Conduct Authority (FCA) — estimated at £5.7 billion in 2021 — prompting calls from lawmakers for urgent regulation to protect consumers from incurring more debt that they can afford.
Those calls resulted in a public consultation that set out plans for the regulation last year. This month, the U.K. government announced plans to strengthen regulation around interest-free BNPL credit agreements.
Under the new rules, lenders will need to be approved by the FCA and must also carry out affordability checks to assess consumers’ ability to take out the loans — a move that Jaidev Janardana, CEO at U.K. challenger bank Zopa, said hails in a new era of BNPL 2.0 centered on regulation and consumer protection.
“[With this] option, we help solve the customer need, which is about compartmentalization of purchasing and paying down of debt, but at the same time, it doesn’t have some of the negative aspects that current versions of BNPL have,” Janardana told PYMNTS in an interview.
One of the downsides of the current BNPL model, according to Janardana, is that the credit scores of customers are negatively affected when they miss a payment. However, responsible BNPL borrowers are not able to build up their credit rating in the same way as if they were using a credit card, for example.
On the lender side, the lack of reporting to credit ratings has allowed customers who have already amassed debt elsewhere to continue to take on loans from other BNPL providers without knowledge of their creditworthiness.
It’s why Janardana said the government’s announcement is in line with the improved offering Zopa is looking to offer consumers, after recently making its foray into the country’s BNPL space: “We feel we are very aligned with the direction of travel.”
Longer, Larger Loans
To date, the BNPL market has been characterized by short-term, small-ticket purchases which, according to Janardana, can have a negative impact on bottom-line growth.
“It’s very hard [for] buy now, pay later businesses to make money because the economics don’t add up for small ticket sizes. They do for bigger ticket sizes like ours, but for small ticket sales, it’s very hard to make that effective,” he explained.
It is the reason why the London-based digital bank is instead offering longer, larger loans between £250 and £30,000 (about $307 and $37,000). These loans give customers the ability to have long-term utility, be it for a computer, a washing machine or perhaps replacing a kitchen, he said — not to mention the opportunity larger ticket items provide in terms of building a longer, more meaningful relationship with customers.
But despite the large growth the sector has experienced in recent years, Janardana said he does not expect BNPL to become the company’s dominant product. Instead, he sees it as part of efforts to diversify the array of credit and financing options Zopa can offer to customers.
“There are people who will use our credit cards to make a purchase because they know they can make the full payment or they might want more flexibility rather than having equal installments,” he said, adding that “all those customer preferences are valid and we need to have a range of options, [including BNPL], to meet those needs.”
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