While buy now pay later (BNPL) presents payment firms with significant commercial and regulatory opportunities, including higher revenues and a way to avoid the burden of strong customer authentication (SCA), future regulatory requirements around the world are likely to be on the way.
In recent years, BNPL has emerged across the world as one of the newest and hottest payment options for merchants to incorporate. According to Worldpay, while BNPL is still in its infancy with 2.1% of global ecommerce transactions in 2020, the sector is experiencing rapid growth, expecting to have doubled by 2024. Although a decades old payment option, the emergence of mainstream online shopping combined with the desire from merchants to collect customer data has allowed BNPL to significantly increase its attractiveness.
BNPL has several commercial advantages over traditional payment options such as cash or card. For consumers, it is popular, particularly among Gen Z and millennials – 56% of BNPL users in Australia for example are under 35. These consumers, who value convenience and flexibility but are wary of credit cards as something too risky, are exactly the age cohort retailers seek out to convert into future brand loyalists.
For merchants, BNPL can be used as a marketing tool, using purchase data to gain a full understanding of their customers and creating another digital channel to drive engagement and gain further market share. Additionally, according to a previously highlighted report by the Australian Securities and Investment Commission (ASIC), BNPL can incentivise consumers to buy more goods and services, buy more expensive items and induce more impulse purchases.
And for payment firms, creating a BNPL payments instrument typically means not falling in the scope of SCA, as fixed recurring payments, along with similar payment methods such as subscription and direct debit are excluded. Dodging SCA for every transaction can be a serious commercial advantage for payment firms as implementation can cause more consumers to drop off during the purchasing stage, leading to higher customer failure rates. According to CMSPI, the European average failure rate in July 2021 stood at 24%, down 1% from the month before and with a low of 12% in Sweden and 42% in Belgium. This is 7 months since the deadline for implementation passed and despite attempts by EU member states to stagger SCA implementation.
However, as well as the opportunities surrounding BNPL, there are also risks. For now, countries such as Australia do not consider BNPL as credit, meaning providers aren’t regulated as such and don’t require a credit licence. However, in the last 12 months alone, there has been a flurry of BNPL-related legislation, with VIXIO’s Horizon Scanning tool showing new proposals in the UK and Australia, with insight on BNPL in the US and EU.
Regulators are intensely aware of BNPL’s effect, as well as how payment firms intend to use the model. The report by ASIC for example noted how BNPL could indirectly lead people into hardship by incentivising them to pay off BNPL debt, avoiding late payment fees but pushing debt held with more flexible forms of credit into the long grass. These sorts of stories, while driven by consumer demand, are the type of development that is likely to lead to new and more onerous regulation.
Here, VIXIO PaymentsCompliance can help payment firms navigate these challenges with our tools, guides, trackers and insight to make sure you stay compliant and thrive, despite new or changing regulations.
Therefore, while payment firms should be keen to take advantage of the benefits that a BNPL model can bring, they should also realise that the regulatory environment is likely to change. In particular, evolving in different ways, whether it’s a self-regulated code in Australia, full regulatory oversight in the UK or battling existing rules in the US.