Dear Luc: How do I get a slice of the BNPL pie?
In Dear Luc, we answer the questions the industry’s fintech founders are too afraid to ask, and solve the problems they don’t want their VCs to know about.
From regulation readiness to technology teething troubles, our start-up agony uncle, Luc Gueriane, is here to help.
Luc has over seven years’ experience working with flagship fintechs like Revolut, Wise (formerly TransferWise), Monzo and Curve.
His expertise and extensive work in the fintech ecosystem mean that Luc is able to offer unique insight into the building of a successful fintech company.
Confession #14: Grabbing the BNPL opportunity
I want to add credit capabilities like buy now, pay later (BNPL) to my service, what do I need to consider?
BNPL has seen rapid growth in the last few years, with fintech experts quoted by Forbes predicting $100 billion in sales across 2021.
Not only has it fundamentally changed the way people make payments across digital channels but it has also given a fast-growing part of the lending space a more contemporary interface and a new lease of life, with huge investments regularly being announced for emerging BNPL providers.
Afterpay, Clearpay, Klarna and Paypal are some of the largest players in the space, however in the last two weeks alone, companies such as Revolut, Monzo and Curve have announced their plans to get in on the action – proving how rapidly BNPL is sweeping the globe.
What is BNPL?
It does what it says on the tin. It is a lending option where shoppers are able to purchase products or services in a number of instalments over a set period of time.
BNPL allows retailers and service providers to provide customers with a native payments solution that reflects their brand and so weaves its way into the online shopping experience. Quick onboarding and checkout are just a few of the practical benefits of such an integration.
Perhaps the most compelling benefit of BNPL is, unlike credit cards, payments are often interest-free and in most cases, each instalment amount and due date can be tailored by each customer.
There are many providers in the ecosystem that have variations of the product. As a card programme provider looking to add BNPL to our service, I can describe some common considerations that we’ve made when advising our partners on how to develop a BNPL offering.
Is BNPL for you?
As with my response to an earlier question about embedded finance, the first thing I’d ask any client wanting to provide BNPL is “Would this complement your existing customer base?”. You need to consider who your current audience is and who you want it to be.
By adding BNPL capabilities to your product offering, will you bring in the right type of customer as per your overall business strategy, or would you be better off sticking to traditional credit instead?
If you have a luxury product catered to high net worth (HNW) customers, providing them with the ability to pay for services in instalments might not be something they would take up, and would mean that you’ve wasted time and effort for no reason.
Whereas, if you had a general spend consumer product catered to millennials, you might find that offering instalment payment options could help to buy you more loyalty.
If you are a loyalty fintech providing accounts to a specific audience and have a rapport with a number of affiliate businesses, adding BNPL could help you leverage those relationships even further to encourage more loyalty for both your business and your partners.
For example, a fintech focused on student accounts could work with stationery and computer vendors, ultimately encouraging students to buy through these retailers via BNPL instalments.
It is important to remember that earlier in the year the Woolard review concluded that BNPL regulation was a “very urgent” matter.
In February, the Gov.uk website announced that BNPL providers will be subject to FCA rules and would need to undertake measures to ensure they were providing responsible lending and affordability checks as well as applying fair treatment to applicants. However, legislative changes are yet to be seen.
Although BNPL currently falls outside of the FCA’s remit, their intention to make it regulated will impact what you need to consider if you add this to your existing offering. Keeping on top of ongoing changing regulations will be a top priority.
Local credit laws
With credit laws differing from market to market, you would have to consider how to navigate and build an international card programme. In the UK, financial authorities such as the FCA and Company House UK will be your go-to check in point. Equally each country will have their own institutions.
For example, there’s the European Financial Regulator Authority, Dubai Financial Services Authority and the Federal Financial Services Authority (BaFin) – each specialising in the rules and regulations for their independent regions.
If you’re an electronic money institution (EMI), as opposed to a ‘bank’ fintech, you will need a liquidity provider to fund scheme settlement and payment to the retailer as client funds still need to cover the full balances held.
When it comes to selecting a liquidity provider, there are many factors to consider.
Verifying the trust worthiness of the LP is one but agreeing on their offerings is another; do they offer diverse liquidity options, segregated accounts for additional protection and offer 24/7 support? Again, the selection process would need to adhere to official regulations – which will differ depending on geographical location.
As with any additional service you provide to your customers, you need to understand how you’re generating income before you use resources to implement new systems.
There are several different factors to consider including: will it be a retailer specific offering, and if so, who would you work with? Will there a limit to the spend or alternatively, a minimum transaction value?
The likes of Klarna already have a badge of credibility, and they are gaining new customers all the time through the increasing number of retailers working with them.
However, as a card programme or fintech bank, you’re not restricted to working with retailers and the opportunities could be endless.
The shape of your offering really depends on the investment involved vs. potential income and likely take-up among existing customers.
Despite BNPL providers being seen by many consumers as the good guys in the credit and lending space, there is no denying that certain providers have caught the attention of the media in a negative way.
In contrast, we’ve seen various news cycles and legislative change focused on payday lenders which encouraged consumers to get into bad debt, so any adverse press about credit has meant some people are more cautious than ever about the protection and regulation currently in place.
The FCA guidance on financial promotion will be a top consideration when thinking about adding BNPL to your offering. This has been especially prominent since the Woolard review, which highlighted the requirement for new rules to be put in place.
There are different sensitivities around how you communicate credit related offerings, and as mentioned in my response to a past question on marketing pitfalls, there is always groundwork to be done to ensure that all members of your team, from product to promotions, understand the practical requirements that come with responsible financial promotions.
As with adding any other service or offering, you will always need to consider whether the investment would work for you.
How can you differentiate your offering from other competitors, where will you generate income from and who do you need to partner with? All these questions determine whether the BNPL will help your business to grow.
However, as always, your customer base is a big determining factor in your BNPL project, as you are ultimately working to solve their solutions – which, when done right, will only increase loyalty to your business.
BNPL services are taking the world by storm and the ease of their use is only further encouraging shoppers and businesses alike to adopt this offering.
Luckily, this means that it’s prime time for fintechs to get in on the action. With an endless number of opportunities that are yet to be explored, considering your move into this space is better done sooner than later, to maximise the rewards on offer.