As the one-stop-shop solution for delivering ultra-low friction financing, Buy Now, Pay Later (BNPL) was born to meet the stringent demands of the retail space.
He did this by using technology to remove bottlenecks at every step of the fundraising process. With no interest rates, minimal sign-up steps, and a focus on user experience, the service has been optimized for the highest conversion rates.
Recently BNPL has started to make the news, with more and more users in the US and UK falling behind on their payments. This has, unsurprisingly, created an increasing amount of negative sentiment around the industry.
In the lifespan of every credit product, there comes a point when the lack of regulation and the lack of safeguards (e.g. credit checks) for vulnerable customers leads to criticism.
It happened to credit cards and payday loans, then to micro-credits, and now it’s happening to BNPL. As the product matures, BNPL must find ways to keep customers safe.
BNPL has been criticized in the past for the lack of clarity involved in the presentation of terms and conditions. Combined with the potential lack of financial literacy of clients, the risk of problems is enormous.
BNPL can involve interest-free financing, but when it comes to late payments, there are fees that add up quickly and can easily get out of hand. So it’s no surprise how easy it is for customers to fall into a BNPL debt hole.
With one in three BNPL users in the US and one in ten in the UK currently behind in their payments, the risk has become a reality. With this type of risk, an extra layer of control must be added to protect consumers.
An open bank for sustainable credit products
Open banking is able to fill in the gaps needed to reduce oversight and increase BNPL’s degree of accountability. Lenders have used open banking to verify regular income and active liabilities.
Among BNPL providers, global brands like Mastercard and challengers like Viabill have expressed the benefits of using open banking for more in-depth credit assessment.
Open banking provides rich insights into creditworthiness data, making defaults easier than ever to spot. With the same mechanisms, the open bank ensures financial inclusion by helping to increase the solvency of all clients, including the less well-off communities for whom access to financial instruments and microcredit can be one of the keys to lift them out of poverty.
As a result, open banking increases the accountability of BNPL businesses by providing all the necessary tools and data, ensuring that there are no excuses when it comes to protecting customers.
Open banking and verification
Any verification process creates additional friction, and BNPL hates friction more than anyone. Compared to previous credit check methods of providing payslips and bank statements, open banking eliminates more friction than it adds.
Just as we got used to credit checks or checking our email address when signing up for a new service, I would say we’ll get used to using open banking for income checks when we split the payments on larger purchases.
For BNPL companies, instead of seeing verification as “just another thing that kills conversion”, it should be embraced and seen as a way to create a sustainable credit product.
In Europe and the UK, open banking regulations have made it easier to share financial data. With the direct benefits and ease of access, open banking just might be the missing piece to help BNPL mature into its next phase.