Buy Now Pay Later Lenders Face Challenges Amid Sector Growth

Challenges in the buy now pay later (BNPL) sector vary from market to market.

In countries where credit is traditionally accessed via credit cards, the installment aspect of BNPL is what distinguishes it from other solutions. For others, it’s nothing more than a solution that has been in use for years.

Take Turkey, for example, where installment payments have been part of the local landscape long before modern BNPL services arrived on the scene.

“The Turkish market has [had] another creative product for ages, which is installment payments by card, but Buy Now, Pay Later is something different […] because it brings instant credit decisions to online purchases,” Soner Canko, MENA FinTech expert, told PYMNTS in an interview.

Watch Canko’s interview: Pandemic Burst of Payment Options in Turkey Triggers Consolidation

Another claim to disruptiveness is the interest-free loans offered by many BNPL lenders.

These terms have certainly helped the concept gain traction with consumers, and when used responsibly can be a much cheaper way of accessing credit than traditional, interest-based options.

But in countries like the U.K., the elimination of interest from the equation allowed the first generation of BNPL providers to evade much of the regulatory scrutiny that their interest-charging peers are subject to today.

As a result of this, the government has moved to expand the scope of the Financial Conduct Authority, its financial regulator, to cover BNPL lenders as well.

However, not all jurisdictions make a distinction between interest-accruing and interest-free loans.

As Canko explained, “buy now, pay later transactions in Turkey are regulated by consumer finance regulations […] so [the solution is] not a big shift [from] the regulatory point of view.” He acknowledged, however, that the speed with which BNPL loans are approved and issued is a “radical change” for the consumer lending business model.

Managing Risk in BNPL Lending

As a result of the relative novelty of the BNPL space, Canko said that lenders are racing to build the best underwriting models that rely on data analytics to assess creditworthiness. Because of this, the still-young industry has yet to settle on a single solution for risk management, he noted.

“Maybe within one or two years, all the big data will be gathered, and we will see what non-performing loan ratios are and what the consumer behaviors are, but [for now] we are at the beginning of this business model and we need data to see what’s going on,” he explained.

But even though BNPL is in its formative years, the product has cultivated acceptable and stable rates of losses so far.

For example, Afterpay stated in its 2021 annual report that gross loss as a percentage of underlying sales remained flat at around 0.9%, even as the company onboarded 6 million new customers — a key factor BNPL providers take into consideration as returning customers have proven to be lower risk than new ones.

That said, all is not smooth sailing, and the BNPL industry has yet to weather a global recession.

In a sign that a wave of credit defaults may be on the way as European economies stagnate, the U.K.’s big four banks have all increased their bad loan reserves — the capital buffer they put in place to cover losses caused by defaulting borrowers.

That risk of people taking on unsustainable debt they can’t afford is central to the FCA’s concern with BNPL lending, which it has said represents “significant potential consumer harm.”

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