In the second of our series (part one is available here), we look at how fintechs can turn risks into opportunities when it comes to consumer-led Buy Now Pay Later regulation. 

Consumer-focused regulation will likely disrupt the business model of Buy Now Pay Later fintechs, and give more traditional FS organisations an advantage in this low-friction credit market. BNPL firms have a close relationship with merchants, but sometimes less so with consumers, and therefore gaining robust visibility over consumers’ overall financial well-being will be a challenge, with several questions that the customer needs to consider: 

1. Can I afford to take on more credit?  

2. Do I properly understand the product and implications of purchasing? 

3. What happens if my financial position changes and I cannot make the repayments? 

It also presents risks for the BNPL fintechs themselves, especially centred around an increased likelihood of consumers not making repayments and going into arrears: 

1. Negative impact on balance sheet and commercial risk 

2. Increased scrutiny and challenge from the FCA 

3. Reputational impact 

What do the original innovators in this market need to do to prevent losing ground to traditional FS organisations? 

Developing relationships through customer journey-led design

There is an opportunity for BNPL fintechs to build more effective relationships with their customers directly through true end-to-end customer journey design, and by leveraging best-in-class capabilities including digital contact strategy, behavioural economics, and voice of the customer analytics. This approach can yield multiple benefits, including improved NPS and CSAT results, and significant cost reduction associated with the more streamlined journeys. 

Designing journeys from the perspective of the customer will help ensure that BNPL fintechs can mitigate the risks highlighted above, with the following considerations applied to journey design: 

1. Truly factoring in the end-to-end journey, from the moment a customer has decided they want to purchase a product, all the way to what will happen if they cannot afford a repayment. 

2. Engaging risk and compliance teams in the design process to ensure any opportunity to optimise journeys in-line with FCA requirements (or preferences) are taken. 
   
   
3. Delivering messaging around education and affordability early in the digital journey. There are innovative techniques available to support here, from the use of behavioural economics to present critical information in a clear and accessible manner, to the use of analytics to identify potentially the financially vulnerable - where customers can be diverted to voice or other channels if vulnerability needs assessed. This approach introduces friction at the appropriate time and in a way that protects customers, whilst this also highlights an opportunity to outsource elements of the process and relieve pressure on internal teams.

The time to focus on this is now, as the traditional FS organisations are already pushing into the market, and only the BNPL fintechs who evolve and transform will be in a position to counter.  

This customer-centric approach also presents the opportunity to challenge some of the negative publicity that is circulating regarding BNPL, for example the Claro Money ‘Bye Now Pay Later’ campaign that was launched in December 2021 with eye catching billboards in London, aimed at alerting consumers to the risks of unconsidered spending and over reliance on unsecured financial products such as BNPL. 

Ultimately, Buy Now Pay Later is the payment method of the moment, with huge growth potential, appealing to retailers and consumers at the same time. However, the model's sustainability in terms of revenue, risk management and customer debt needs consideration. The signs are encouraging, but the unsolved challenges remain important, even for established financial operators.  One thing is certain - deferred payment is more relevant than ever, and BNPL can no longer be ignored. 

Dafydd Hobbs is the Client Partner for Financial Services at Gobeyond Partners.