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Fintech redefined through buy-now-pay-later

Buy-now-pay-later services increase in popularity and valuation, as the low-cost, multiple-instalment appeal of BNPL results in an astounding increase in such payments.
Lavina Ramkissoon
By Lavina Ramkissoon, Conscious Creator I Trailblazer I Thought Leader
Johannesburg, 24 Jan 2022

Buy-now-pay-later (BNPL), which used to be called ‘lay-by’ options back in the day, allows apps to give millions of users the chance to instantly purchase what they want, then pay off the item in instalments.

But as BNPL services expand, consumer protection advocates worry it may lead people into buying more than they can afford.

Ask a young person the last time they used cash, or even a physical credit card, to make a purchase and you’ll likely be surprised. In the last 18 months, digital payments have exploded, with contactless payments, instant money transfer and single-use digital credit cards among the payment options with the quickest adoption.

BNPL services have increased in popularity and valuation. While online shopping soared last year during the pandemic, credit card companies kept credit limits low and reduced, as lockdowns contributed to layoffs which prompted fears of widespread defaults. Meanwhile, the low-cost, multiple-instalment appeal of BNPL led to an astounding increase in such payments.

Popular international BNPL services include Affirm, Afterpay, Zip (formerly Quadpay) and Klarna, while African options include CredPal, PayFlex and Sympl, to name a few.

As a function of open banking, the management of our real-time money gives us an idea of how to distribute and manage our cash flow for expenditure on rent payments, air flights, etc. This can cause problems from a legal to credit perspective.

Imagine the BNPL app pays landlords the full monthly rent directly at the start of the month. It then deducts half of the rent payment, plus a monthly convenience fee, from the user’s bank account. The user then pays the other half in flexible instalments, deducted from their bank account. Anyone in the economy becomes a lender.

The convenience can itself be a trap, as most BNPL apps run only a “soft” credit check. While some apps lock users’ accounts when they fall behind on payments, consumers can switch to another service.

The convenience can itself be a trap, as most BNPL apps run only a “soft” credit check.

‘Usage only for now’ describes a recurring scenario where a person with steady income may have four or five recurring BNPL payments, and then a sudden misfortune − a layoff, a sick family member, a car repair − throws them off track, leading to multiple instant late fees and overdraft charges.

If users are not able to keep up with those payments, it will impact their ability to afford the things they actually need. Responsible lending is a must – take note credit bureaus and financial institutions.

Traditional lenders like banks are increasingly competing with fintech firms, so they will need to upgrade their technology to support BNPL, among other types of digital lending initiatives.

As fintechs continue to elbow in on banks’ core markets of accounts, payments and lending, banks can take a lead in BNPL by improving loan servicing on the backend, which allows their organisations to streamline borrower experiences on the frontend.

We've seen credit flood the market before when no one was paying attention. That ended up not being good for consumers or the economy.

Lawmakers and regulators are taking notice. Awareness on the consumer part and through the banking sector may aid the reduction of the potential risks to consumers of the services. Tighter regulation is required, as is more data on how often users default, the potential long-term impact on credit scores, and tighter rules around credit approval.

BNPL is here to stay. Consumers worldwide love the seamless, point-of-sale experience of buying products on instalment with zero interest; retailers love that BNPL is a simple, low-fee way for consumers to pay; fintechs and banks love how BNPL opens up an entirely ‘new world’ of digital lending. However, awareness, regulations and co-operation are required in the new era of digital-first lending.