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Buy Now, Pay Later: The Dangers of Accessible Debt for Banks and its Customers

How is the financial services sector handling it and how are consumers responding to it?

Buy Now, Pay Later (BNPL) has quickly established itself as the go-to method of financing for a variety of purchases, particularly online.

George Baily
George Baily

George Baily, former Product Marketing Manager at FintechOs, and currently Product Marketing Lead at, states that BNPL is a business model that has been mainly outlined by Fintech challenges and which is going to remain limited to challenges. Just as one cannot search without Google, one cannot discuss e-commerce without mentioning Amazon. Likewise, when talking about the BNPL, the leading provider is Klarna, which has the primary objective of making it easier for people to shop online. Klarna, also associates itself as the leading fashion brand among the younger generation, allowing them to spend money they do not have and enjoy products that would not have been accessible otherwise.

The company firm has the intention of allowing people to proceed with payments for all kinds of products. Clearpay is another brand that allows people to have more control over their budgets and purchasing decisions. A different example is Laybuy, which gives customers the convenience of receiving goods or services immediately.

It can be observed that the digital retail economy has jumped to over $26 trillion in turnover. In the US specifically, e-commerce increased by 50% during the pandemic time, and there was a historic inflection point last year. During the pandemic, most of the population was working from home, and we’ve seen this massive shift in the market share of brick-and-mortar retail to e-commerce. This stat shows a 200% increase in e-commerce for furniture and home electronics and 170% growth in food and beverages. This is way bigger than fashion and retail, which nearly grew by 38%.

According to the Hootsuite data below, e-commerce sales are being driven not only by the youngest generation but also by consumers in their late 40s and early 60s.

The more impressive fact is that the mature generation is now becoming frequent users of digital banking apps.

Main challenges of BNPL
Laura Vizir
Laura Vizir

Laura Vizir, the Chief Product Officer at TBI Bank, claims that all banks should be able to cater to the financial demands of their customers. Young customers tend to be easily influenced by online shopping. TBI Bank, which operates mostly in Romania, Bulgaria, and Greece, has observed that there is a growing trend among young adults moving toward this direction of online shopping. Nevertheless, there are numerous challenges and risks associated with BNPL.

Laura identifies the first challenge as the biggest one, which is the risk of being over in debt. Banks are reputed to have the objective of a smooth journey for their customers proceeding with purchases. However, if customers repeatedly choose a BNPL option for online purchases, there is a high risk of debt. Yet, there are solutions such as soft checks that enable banks to understand if the customer can afford it. Another solution is for BNPL providers to have the capacity to look at the multiple transactions of BNPL and give the customers solutions in terms of repositioning their monthly installments over a longer term. In the banking industry, it is called re-financing. It can be done with the same smooth experience for the customer, but only offering what is needed without being a burden.

The second challenge is how to balance customer financial background checks with a smooth customer experience. The financial sector should operate in a systematic manner so that the customer does not feel anything, and that translates into an online smooth journey. The second solution recommended is to utilize new solutions, like open banking, to give the customers a better experience. Certainly, this encapsulates the balance of old data and the banks' readiness to expose the data for use in the processing of issuing and, once again, the smooth experience of the customers. There is a lot to align in that space in terms of the readiness of the banks and requirements from the customers to comply with those checks. Also, the readiness of the market is different depending on the country of operation. For example, in the UK, many databases are publicly exposed. In Romania, there is a long way to go and opportunities are all around it, from the KYC, the banks making sure that the customer is the customer in the easiest way to pure data source providers.

Laura also laid emphasis on the selection of the right business model. BNPL is present either at the checkout of the merchant or is present with a solution for customers to pay for that transaction to the merchant. The easiest way for a bank to start with BNPL is to go and integrate it with merchants by partnering with them to enable this type of financing. It’s the way to grow, but at the same time, it is difficult to do that on a mass scale since it is time-consuming with negotiations and technical integrations.

Many banks are going in the direction of enabling the BNPL experience for their customers and the question is whether it is a partnership or an in-house product. The finance sector in general is a fan of in-house products because of its legacy systems. However, it is easier to get to market speed with a product that is already developed and one simply needs to adapt and tailor it to the needs of the audience. Because of the fact that there is a new way of doing business, the bankers need the know-how irrespective of the model that is opted for. Then, it is an easy adaptation since it is more practical to adapt something already in place rather than build it from scratch.

How to ensure ethical lending and what can banks do to minimize risks?
Ivan Ivanov
Ivan Ivanov

Ivan Ivanov, the Director of Retail Banking at Bulgarian American Credit Bank, with 17 years of banking experience, shares his point of view about ethical lending and BNPL. Ivan states that the positive aspect of BNPL is highly discussed, that is, it is a very small process and easy for the customers. However, it is also one of the generators of the greatest risk that we can see. One of the risks is that BNPL is a form of the credit approval process, and the lending process as a whole is designed to achieve fast growth. BNPL as a business model actually has a very high volume and is extremely sensitive to funding, which makes it very hard to make a profit. Hence, BNPL players have a profitability challenge where none of the pure players up to now have been profitable, and at the same time, there is a lot of competition coming in because it is a hot topic.

Eduards Timovejevs
Eduards Timovejevs

Eduards Timofejevs,'s Head of Product and Citadele Bank's Head of Digital Ventures, elaborates on the industry's concerns about BNPL. BNPL is one of the topics in the industry and risks are present in the market. There is occasionally a bad taste in this BNPL and consumer lending. Some years ago, many people were guaranteed that during this time, all would be regulated. The financial sector is finding it difficult to accept that there is a rate of interest. However, without more strategy other than just lower costs, they will be out of business.

Jan Andresoo
Jan Andresoo

Jan Andresoo, the CEO & Founder at Paywerk AS, explained that the BNPL might be regulated away since it will be the last wave of fintech lending. Per Jan, the product itself is still a good and needed product. It is a kind of modification of the credit card that takes the best thing from it and puts it in the moment when customers are making the purchase. A kind of evolution that is much needed. However, Ivan shares the same sentiment as Jan that the motivation behind the BNPL players is not very understandable. The business model clearly values both growth and cost, which is likely driving the wrong motivation. On the contrary, both agree that it is not a very easily accessible market with very heavy technological needs, especially when merchants are trying to do the integrations. The majority of the European banks still don’t have access to BNPL due to the restrictions in terms of development and technology. Therefore, the key question is how to make this market accessible for banks. It's relatively easy for banks to enter without requiring extensive integration and development. This will bring cheap funding and totally different changes to the market.

Jan also indicates that BNPL is the facilitation of consumption. This is because, obviously, merchants and retailers are interested in high positive rates and positive conversion, which motivates them to be riskier from the point of view of financial investors.

Laura's employer TBI Bank is trying to have a cautious approach. TBI Bank does provide different lending repayment capabilities, and it not only aims to be an inclusive lender, in the sense that it provides its customers hassle-free access to funds but also to make sure that, in the long run, customers’ financial wellbeing is taken care of with different repayment plans and affordability. Currently, TBI is operating with 14,000 merchants, and it is aiming to expand and meet the demand of all consumers.

Eduards asserts that the user experience using physical or online can be the smoothest, most beautiful interface, but if one doesn’t get the product, then the experience means nothing. There are very high costs that are hidden in how the product and services are developed and it is openly communicated to users. With the ever-changing regulations, some lenders focus on just one thing, which is a long-term business with a good reputation. When entering new markets, banks are struggling to play it safe. Customer experience is the biggest risk then the technology opted for is important. There are two big risks - customer experience and the technology being used. It's hard to please everyone. Some people prefer to buy on Amazon, some on Aliexpress. Technology partners can assist banks in reaching that scale.




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