Buy Now, Pay Later (BNPL) services have gained massive popularity in recent years due to their attractive mix of benefits such as convenience and flexibility. However, economists have warned that a weak regulatory framework for the sector coupled with its soaring popularity could pose some serious risks for the financial system.
Emerging Risks of BNPL Services
In a recent report, the World Economic Forum highlighted some potential risks of BNPL services, an industry that has taken eCommerce by storm over the past years. The organization claimed that weak underwriting rules and ease of access to BNPL create some systematic risks that could threaten the broader financial system.
In the first place, BNPL creates an opportunity for overborrowing and the piling up of shadow debts. That is because even users who are not eligible for bank loans or have maxed out their credit limits might find it relatively easy to access BNPL loans.
With the availability of the BNPL financing option, users are three times more likely to finish their purchase, the report said. There has been a more than 400% increase in the volume of transactions by millennials, who are notably high users of BNPL credits, over the past few years.
According to research by Barclays, almost a third (31%) of British BNPL users said the lending had got them into problem debt. The report added that a quarter of BNPL users already feel unsure about their ability to settle their BNPL debt.
Furthermore, BNPL risks can spill over to the broader financial system. BNPL providers sell their outstanding debt to investors as securitized assets to raise funds. “In a weak economic cycle, the ability of consumers to repay their loans may be impacted, potentially leading to large delinquencies.” the report said.
The organization even claimed that if BNPL securities continue to grow significantly, it could lead to large-scale defaults similar to the mortgage-backed security crisis in 2008. Rating agency Fitch has already warned about higher credit risks associated with this product.
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Apple Joins the BNPL Race as Interest Grows
In June last year, Apple announced its BNPL service as part of its new operating system, iOS 16, during its annual Worldwide Developers Conference (WWDC). The service allows users to purchase through Apple Pay and pay the amount in four installments over six weeks with no interest.
The foray into the BNPL industry came as Apple built a foundation to scale its payments business to fuel its growth further. The financial services already contribute more than 20% of Apple’s revenue, up from less than 10% in 2015, according to Business Standard.
The move also comes as interest in BNPL loans continues to grow. According to the WEF, BNPL payments hit over $120 billion in 2021 and are projected to grow by 24% over the next three years. By 2025, 12% of global e-commerce spend is estimated to come from BNPL transactions.
Meanwhile, the report noted opportunities to mitigate emerging risks from BNPL. It claimed that clear regulations must be implemented to protect customers from overborrowing, improve transparency on customers’ ability to pay, and inform investors on the quality of securitized debt.
The report also suggested that BNPL providers could aggregate data from banks and other players within the open banking ecosystem to create a comprehensive view of the customer’s spending habits, which can subsequently feed into their lending decisions. It added:
“Consumers already overextended with other lenders and at risk of overborrowing can be identified and precluded from new credits until outstanding balances are settled.”
Do you think BNPL providers need to lower their approval rate? Let us know in the comments below.
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