We’ve all seen this movie before: Consumers discover a new way to buy more things in installments. Cool new tools like Affirm, Klarna and Afterpay let them sidestep traditional credit cards to buy now, pay later (or BNPL in the lingo).
There’s the promise of no interest, low fees and no complicated application process. Credit checks are instant and retailers love adding the feature to their ecommerce shopping carts because consumers purchasing more — as much as 45% more.
Suddenly anyone can get a free loan quickly and easily. Visa, PayPal, Square and even Apple are getting in on the action with their own flavor of BNPL. Traditional retailers like Macy's, Target and Walmart are all pushing their own BNPL offerings too, hoping to see fewer abandoned carts and bigger baskets. Free money is everywhere, and everyone buys more stuff. Pop the champagne, life is good.
And then the bill comes due.
A few years in (more than 10 years, actually), the buy now, pay later craze is starting to show an all-too-familiar downside of easy credit. Suddenly consumers are overextending themselves. And because BNPL loans are not secured, there’s nothing to stop a consumer from racking up balances with multiple services. While there are ostensibly no interest charges, there are hidden fees for missing a payment. All of this adds up to the potential for abuse with late repayments and delinquencies are already rising. Bottom line: There’s too much debt being issued to too many people with too little oversight — and we know how that movie usually ends.
Suddenly BNPL looks less like a way for consumers to take on sensible credit, and more like a wild scheme to hand out billions of dollars to subprime buyers—leaving both consumers and retailers holding the bag.
That’s because the technology for making lending decisions is still catching up. Automatic credit approval is subprime lending at the speed of automation, and it's kind of scary.
There’s a lot of debt out there and retailers don’t really know if it’s any good. Meanwhile, the BNPL market is seeing explosive growth, up 27% year-over-year. BNPL spending in the U.S was expected to total $226 billion in 2021, according to a Juniper Research report, and a lot of Americans are using it. As of March 2021, 56% of Americans report having used the BNPL option.
Whether it’s mortgage-backed securities or savings-and-loan banks, modern financial history testifies to the catastrophic consequences of moving too fast and loose without proper diligence.
For BNPL to avoid this fate, we’ll need an evolution in how we check creditworthiness and tools to help speed the process so it doesn’t introduce so much friction that it kills the promise of BNPL. In the U.S. and Europe, regulators are waking up to the fact that we don't want another payday lending market meltdown or subprime mortgage fiasco.
The key tenets of good credit are: Can the customer afford to pay you back? Does the customer understand the terms and conditions? And if the customer defaults, for whatever reason (life has a habit of throwing things at us like layoffs and COVID) what happens? Is the process around collecting that money transparent and fair?
The reality is that credit reference agencies are not equipped to handle real-time small average transaction values and a gazillion hits. They're used to providing a credit score when a consumer is taking out his mortgage or car loan, once every four years. But if a consumer is buying smaller items every week, they just can't handle the queries. And they certainly don't work in real time. They tend to batch up the queries, and they're usually six weeks out of date.
The right technology can pre-emptively solve most if not all these problems.
Take affordability checking. With the right technology, you can do affordability checking in the background without asking the customer to input their salary and their outgoings, what you would normally do when you want to take out a mortgage. That's a real live conundrum that the right technology can solve.
In order for BNPL to be a more efficient means for purchases the industry should look to build protocols and technologies that can withstand the needs of today’s lenders but also those three, five and even 10 years down the road.
Ideally, we would want to harvest BNPL data at the Consumer, Account and Agreement level from all BNPL providers in a market on a Daily frequency. This would address the latency and provide great assurances for the lenders.
A daily snapshot of that data should be held in a repository and pushed to all customers (BNPLs / Other Lenders) via batch file on a daily cycle. This would record and share a consumers current position with all their BNPL Providers and make it available to the entire industry.
If we look longer term, a real time API integration would be provided to allow lenders to call and query by consumer and return required data points intra-day. This data would not necessarily replace existing data sources used for credit risk decisions/credit worthiness check /affordability checks but would enrich existing data with what we believe to be the most valuable, relevant and appropriate data for BNPL lending.
When you think about it, buy now pay later is still in its infancy when compared to traditional debt lending like credit cards, but in order for us to get this right we need the right mix of technology and data science to make it worthwhile for everyone.
Rodney Bain is the CSO and Co-Founder of Apexx Global, a multi-award-winning global payments platform. A specialist in global acquiring, complex payment acceptance setups, and innovation in payment technology, Rodney previously served as Vice President of Partnerships at EVO Payments International, the payment arm of Deutsche Bank, Bank of Ireland, CITI, and PKO.