Buy Now, Pay Later (BNPL): High Reward, High Risk?

Buy Now, Pay Later has finished 2021 strong, the new payment model seeing strong adoption over the past 12 months particularly as the pandemic forced a number of shifts to consumer spending habits. The biggest platforms continue to expand – BNPL company Klarna recently extended its services to incorporate all online retailers, whether they’re Klarna partners or not – but while they and other players have reaped the rewards, the longer-term potential pitfalls of the product are only beginning to be visible as data becomes available.

In a recent survey from Pipslay, some 43% of Gen Z respondents reported they’d missed one of their BNPL payments in the past.  Millennials were somewhat less prone at 31%, but the age-old question of what’s to be done in the event of default is certainly rearing its head for Klarna and many others operating in the space.

“You see this in credit cards, too, but in credit cards the margins are very high,” said Harpreet Singh, Business head at iKredit 360, in a recent IBS Intelligence webinar. “They can absorb losses.  In BNPL, since there’s no net interest, companies will struggle to cope with high delinquency.”

As problems go, it’s not one that’s unique to FinTech companies operating in payments.  Learning the best fit for origination practices and fulfilling Know Your Customer steps isn’t always as simple as just doing what a traditional bank might, but the risks for getting the answers to those questions wrong are still very high for platforms operating in the space. A lot of thought has to be given to how customers are sourced – and, very likely, a platform with much slimmer margins likely can’t operate in the long-term giving out credit as freely as Visa or Mastercard.

It’s a concern for retailers, too, who are relying on these kinds of loan origination services to boost sales during a holiday period where the pandemic still has many coming up short on hard cash. BNPL can help push consumers over the finish line to making a purchase they might otherwise hesitate to go through with, but defaults can dry up that business quickly, leaving merchants with unrealistic expectations as to how many of their goods are likely to leave shelves.

“BNPL models don’t need only to take care of the customer, but also these merchants,” Singh said. “It’s a triangle of confirmations, and unfortunately that third angle is not spoken of very often.  I think it’s time we focused on it.”