Around 2020, buy now, pay later (BNPL) solutions exploded in popularity, as an increasing number of shoppers across the globe turned to online shopping during a pandemic that caused a significant amount of financial uncertainty.
However, since then, many BNPL firms and providers have crashed back down to reality; with the likes of Openpay, the Australia-based BNPL operator, halting operations for good and Klarna, the now self-proclaimed AI-powered payments network and shopping assistant (famous for its BNPL services), seeing an 85 per cent downturn in its valuation between June 2021 and July 2022.
Now, reports suggest that NatWest is planning to shut down its BNPL offering for good, less than two years after its launch. After suggestions that the decision was made due to less-than-expected adoption of the service, it appears that even the biggest UK banks are struggling to make headway in the space.
Upon the launch of the service, NatWest explained that it planned to disrupt BNPL in the UK “to make it better and safer”. However, much uncertainty continues to surround BNPL due to a lack of regulatory oversight. Although the Financial Conduct Authority (FCA) promised to introduce regulatory rules for the space last year, the plans appear to have been put on ice, causing concerns about the future of the short-term financing solution.
It might not just be uncertainty that is impacting BNPL’s success. Difficult macroeconomic and geopolitical conditions across the globe have impacted practically every financial sector there is. As interest rates rose to heights not seen for many years, it has become increasingly difficult for firms to ensure a profit year-on-year.
But what other factors could be forcing so many BNPL providers to close their doors, or take steps away from the space?
High-interest rates and fierce competition
As Alastair Douglas, CEO of TotallyMoney, the personal finance app, explains, macroeconomic conditions are still having an impact on the BNPL: “What drove the meteoric growth in BNPL services was the rapid rise in vendor integrations which not only benefited providers and shops by increasing basket values, but also offered customers an easy way of spreading the cost at check out.
“However, over the past two years, we’ve seen a global economic downturn, with high inflation not just eating away at people’s financial resilience, but also changing the lending landscape. Customers are now finding it more difficult to keep up with repayments, while high interest rates and rising defaults are challenging BNPL providers.
“For new-to-market BNPL firms, and banks offering these solutions, securing and maintaining vendor relationships is becoming increasingly challenging as competition is now far greater than it ever was, forcing some to pull products and out of markets altogether.
“Regulation of the sector would bring it in line with existing forms of credit, and improve transparency while offering greater customer protection. In turn, this could repair its tainted image, and unlock new opportunities and audiences who are otherwise reluctant to BNPL.”
Fintech pips banks to the post
In many cases, we often see how incumbent banks remain the most trusted organisations in the financial world. While banks are often ‘late to the party’ when it comes to financial innovation, they generally appear to maintain their customer base; even despite tough competition from countless fintechs and newer digital banks.
However, Frode Berg, managing director of EMEA at Provenir, the credit risk decisioning platform, suggests that the likes of Klarna have managed to dominate what is now a very overcrowded BNPL space: “BNPL financing is not slowing down any time soon, and recent research most certainly backs this fact. According to Polaris Market Research, the global BNPL market is projected to expand from $6.24billion in 2022 to $80.52billion by 2032.
“However, for several reasons, traditional banks are gradually stepping back from the BNPL space. The market has become oversaturated with BNPL providers and younger consumers gravitate towards BNPL services offered by popular providers like Klarna, bypassing traditional banks.
“Given the current economic climate, we’re also seeing that banks in the current lending landscape are increasingly refocusing on their core lending products, like credit cards, overdrafts, and loans, favouring more established and sustainable revenue streams. This shift aligns with the financial industry’s broader trend of prioritising profitability, sustainable growth and risk management amidst economic uncertainty.
“The challenges in achieving profitability within BNPL, including low utilisation rates and high operational costs, further deter banks.
“Regulatory uncertainty surrounding BNPL adds another layer of complexity. With the upcoming BNPL regulation being pushed back and Consumer Duty coming into force last year, banks are hesitant to invest further in BNPL offerings without stronger regulations and guidelines. This is resulting in banks recalibrating their strategies to prioritise stability and profitability.”
Is BNPL simply ‘a difficult product to maintain’?
Jakub Piotrowski, VP of product at Bud Financial, the AI-powered data intelligence platform, believes that one of the biggest factors limiting BNPL’s success is challenges regarding risk management: “The way financial institutions operate makes BNPL a difficult product to maintain.
“Aside from a competitive market creating pressure on terms and expensive customer acquisition, there is a major risk management challenge.
“Because BNPL is not always reported to credit reference agencies, it is increasingly difficult to get an accurate assessment of risk and affordability for the customer. This creates a vicious cycle where increased adoption of BNPL increases the risk. There are ways of managing this risk, mainly with the adoption of open banking, but that requires re-thinking the model.
“Also, major banks are still avoiding using open banking for credit-related analytics, especially for unsecured lending, which limits their ability to act. We end up with a situation where customers (often those who are vulnerable) are allowed to stack up BNPL debt without visibility for the lenders. Because this tends to concentrate on the most accessible lending, BNPL providers are the most exposed. It can be managed by augmenting slowly-changing credit files with up-to-date spending data and insights coming from open banking, something that Bud does for many lenders.”
Is BNPL bad for brand image?
While a lack of regulation contributes to wariness about BNPL for many financial firms and fintechs, other negative connotations about it, such as a widespread belief that some firms aren’t being completely transparent about late fees, could also be harming the space.
John Clark, product manager at card payment provider takepayments, suggests that this may well be the case. Clark explains: “As BNPL is essentially a loan, there’s a high risk that some customers may not be able, or remember, to pay the borrowed money back, leading to late fees laden with interest which may hurt their chances to borrow money in the future. Some firms might be wary that the negative connotations that have started to surround BNPL could impact their own brand image.”
He also reveals that, for retailers, the cost of implementing and maintaining BNPL as a payment option could end up being a costly decision: “While some providers, like PayPal, offer BNPL payments as part of their contract, businesses might find themselves needing to call on the help of a specialist third-party provider to take care of technical requirements, but it won’t come for free. Most providers charge an initial set-up fee and the process to find and negotiate a deal could require thorough research.”
How these factors will impact the buy now, pay later ecosystem is yet to be seen. However, signs suggest that the likes of Klarna may have done enough to see off the competition for the time being.
