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What will the recession mean for BNPL?

Thanks to its popularity among Gen Z's go-to retailers, the buzz around Buy Now, Pay Later (BNPL) may seem new, but the concept is as old as credit itself. What makes BNPL different is the seamless digital delivery it provides to enhance the online shopping journey. Want that new jacket but don’t have the funds? Forget borrowing from friends & family or applying for a loan—simply tap ‘Pay with ….’ to instantly order the item and split the cost into smaller, more affordable chunks over a few months.

Incumbent banks and payment providers may have missed this early BNPL boom. But instalment credit is also risky, particularly when customers overextend themselves. Lenders like Klarna and Laybuy operate on a different model to credit cards. And with more consumers struggling in the cost-of-living crisis, the inability to meet payment deadlines now threatens the industry's longevity. In July, Klarna’s YoY valuation plunged by 85%. So, how might Buy Now, Pay Later survive an upcoming recession?

1. Lenders will start to turn people down

BNPL differs from credit cards, which are open lines of credit. Credit cards allow customers to make regular purchases up to an agreed limit and only pay interest on what they borrow. During the 2008 financial crisis, banks closed their customers’ inactive credit cards to cushion themselves against record loan losses.

However, BNPL businesses cover a collection of one-time purchases and cannot reduce credit lines. So instead, lenders are likely to tighten up consumer eligibility and even limit the sizes of loans to reduce losses. We’re already seeing this with Klarna— in August, the CEO stated it would start to “lend a little less sometimes, especially to new consumers.” 

2. A lack of visibility will require better reporting

There isn’t a uniform credit bureau reporting of buy now, pay later borrowing. When a customer uses a BNPL service, the lender doesn’t know how many different debts the customer is already carrying and whether they’re a model borrower who pays back on time—or someone with several overdue repayments. 

A similar phenomenon occurred with Lending Club and online unsecured lenders in the peer-to-peer boom of 8-10 years ago. Poor reporting meant lenders failed to detect the ‘stacking’ of multiple loans from different companies by consumers, leading to rising obligations, inabilities to repay, and increased risks of defaulting. Contrast with credit cards, highlighted on customers’ credit reports so lenders can make informed decisions. 

The integration of open banking may help to improve BNPL reporting. However, consumers would need to agree to share their data. And while responsible borrowers are likely to do so, those who struggle to repay may refuse consent to protect their future borrowing prospects.

3. BNPL businesses will adapt to remain relevant

As Jack Dorsey, founder of Twitter, says, “there’s no better time to start a new company or a new idea than a depression or recession.” So, lenders must continue to invest and innovate to ensure continued growth and find new profitable avenues. For example, in August, Klarna began reinventing itself as a one-stop e-commerce shop that enables customers to track their online purchases on one platform, regardless of the retailer or payment method.

Recessionary conditions present opportunities to banks and financial service providers. New offerings draw in all account and transaction data to help consumers and small businesses budget, save, and invest. The key to survival is to manage cash flow. Business models should be adapted to help consumers navigate potential crises. BNPL lenders can define themselves as key players in financial services.

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Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 01 December, 2022, 12:58Be the first to give this comment the thumbs up 0 likes

My company is currently running a marketing campaign targeted at US banks to convert their credit card outstandings to BNPL. At the height of pure-play BNPL mania last year, this seemed too conservative an approach. But, with the burst of the BNPL bubble this year, it seems to be prudent in hindsight! After all, credit card spends are already subject to rigorous credit checks, so the BNPL loans via credit card conversion are likely to have better repayment rates than pureplay BNPL loans, which are already showing higher default rates.

Notwithstanding the attempts of Online P2P Lenders and pureplay BNPLs to undermine its validity through the years, the old maxim that it's easy to lend but difficult to collect seems to hold good even in modern times.

David Ritter

David Ritter

Director, Financial Services Strategy

CI&T

Member since

09 Jul 2021

Location

New York

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