Tags – Risks of Marketing Buy Now Pay Later
BNPL has given rise to a slew of new fintech businesses, but banks, credit unions, and virtually every other player in the consumer credit and payments industries is rushing to evaluate BNPL’s influence and make decisions.
So far, the scorching buy now, pay later market is not anticipated to cool down anytime soon.
That said, there is a dark side to BNPL that few people are aware of. Not in the sense that the products’ companies have malevolent intentions—BNPL provides advantages to customers, merchants, and providers, after all—but because BNPL as it presently stands is beset with several negative facts that must be thoroughly considered.
1. Profitability
Lenders don’t profit from interest-free loans. When compared to traditional instalment financing, BNPL offers less money for lenders in today’s business model.
Here, the main issue with BNPL is that profit made from MDRs does not match the money made from a regular instalment loan for the same amount of money.
To make up for the lower income, BNPL gamers will either need to raise the merchant discount rate (which may not be appealing given merchants’ expenses, discussed next) or come up with additional methods to increase revenue.
2. Expensive for Businesses
Businesses that take BNPL must pay a 2% to 8% fee plus interchange expenses, as well as a flat per-transaction charge in some cases.
Also, there is little in the way of education about BNPL programs for merchants. For example, how to ethically market these types of plans and make all of the various costs and interest rates clear to customers.
3. Confusing for Customers
A credit card is required to complete an application for a BNPL loan. The merchant who sells the item can’t apply for or receive a BNPL loan, so customers are often perplexed as to who they should contact if their purchase is cancelled and a refund is required. Is it the merchant or the bank that handles these loans?
Here, some merchants may help with this, while others may not. So, consumers must handle the refund and/or credit procedure directly with the BNPL provider, regardless of whether they use a merchant service provider. As a result, it might be inconvenient and outweigh the convenience offered at checkout.
4. Fraud Risks
Unethical businesses can be a source of fraud. The danger for a Buy Now, Pay Later FinTech lies in failing to identify genuine from fraudulent merchants.
Sadly, orders submitted using stolen or fraudulent consumer personally identifiable information (Pii) and paid for by the consumers “sold,” but not actually delivered, may go undetected.
5. Comparison with Credit Cards
Borrowing money has its own set of risks. BNPL’s seamless checkout makes it simpler for customers to impulse buy and spend too much.
Simply, BNPL may entice customers to take on much more debt outside of their credit card restrictions if they are unable to spend too much on credit cards.
Although BNPL is more expensive than other options, one of the things retailers appreciate about it is that it leads to larger purchases.
6. Unsustainable in the Long Term
Despite the fact that today’s zero interest rate environment makes it easy to make interest-free payments, this may not last for long once interest rates rise in line with economic growth and inflation.
Furthermore, standalone BNPL providers may only be profitable if credit losses are much lower than 5% of loaned capital and borrowing rates approach zero, without taking into account other operational expenses.
Despite the current favourable conditions, Klarna, Afterpay, and Affirm have yet to earn money as standalone BNPL providers.
7. Regulatory Uncertainty
Millennials and Gen Zers, in particular, are at a critical point in their lives when it comes to learning how to establish financial habits. Products like BNPL do not assist since they make impulse buying simpler by making compulsive spending a habitual activity without the money.
So far, BNPL providers have operated with substantially less regulation than the heavily regulated credit card sector. This is a danger to BNPL businesses, especially as regulatory scrutiny has increased.
Another concern is that BNPL rules may force businesses to obtain credit broking authorisation, which would deter small firms from offering the service due to the additional effort and danger.
8. Current Systemic Risks
BNPL providers are not required to submit transaction data to UK credit reference agencies at this time. As a result, other credit checkers are unable to incorporate the influence of BNPL activity into future affordability estimates.
So, the inherent opacity of BNPL agreements might pose a threat to the general credit market.
Unsecured credit, for example, might result in unsustainably high debt that endangers the financial system’s stability, as well as unsecured credit without hard-credit checks and at non-subprime rates.
What does the Future Hold for BNPL?
Regulation will have a significant impact on BNPL innovation and the creation of new technologies and goods, which will bring both opportunities and risks.
As consumers demand more from their financial institutions, new bespoke and adaptable solutions will emerge.
Here, regulation may be able to achieve a balance between consumer protection and innovation, with the risk of financial devastation balanced against BNPL benefits, which would have a beneficial influence on the consumer credit market as well as beyond.
However, regulation will not be implemented in a few days or weeks. Because the sector must adapt to new compliance standards and technological advances, it will take some time.
But, what is certain is that BNPL innovation is spreading throughout sectors at a rapid rate, and there must be the appropriate technology to drive these innovations as well as adequate regulatory oversight to safeguard customers.
Until then, plainly pushing BNPL as a marketing ploy comes with its own set of risks and potential PR challenges, based on how the consumer behaviour is going to mould the market.
To learn more, get in touch with us today.
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