Buy now, pay later (BNPL) companies are evolving their product offering strategies amid change in regulations

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Driven by the pandemic, the buy now, pay later (BNPL) payment method has gained immense popularity, especially among young customers. However, many companies provide BNPL options to young customers based on the New-To-Credit (NTC) option without a detailed background check. Moreover, there is a lack of awareness among young customers regarding the consequences of non-payments. Therefore, non-payment of loans negatively impacts companies’ profitability and increases the chance of consumers falling into a debt trap.

According to PayNXT360’s global survey, the revenue missed fee in the BNPL market recorded a growth of nearly 81% (year on year) in 2020, which is a witness to an increased number of non-payments. Thereby, intervention from regulatory authorities has been witnessed in the BNPL industry to ensure strict credit checks by the BNPL providers to safeguard the population from any debt trap.

Klarna introduced a new tool to implement strong credit checks for clients

In October 2021, Klarna Bank AB, a leading fintech introduced changes in its offerings in the United Kingdom, due to expected increase in regulations by the government, on BNPL industry. The government announced in February 2021 that the BNPL business operating in the United Kingdom would now come under the supervision of the Financial Conduct Authority (FCA), who is responsible for regulating the financial markets in the country. Regulating the BNPL space has become imperative as there is a risk of consumer harm due to the lack of affordability assessments by the BNPL firms. The FCA indicated that BNPL users do not consider affordability on their own because they fail to see the BNPL offering as credit. As a result, there is a possibility for customers to get trapped into excessive debt.

In order to abide by the government regulations, Klarna is planning to implement stronger credit checks on clients, before offering BNPL options, to ensure the affordability of products by users. Klarna is using a new tool allowing its clients to share their financial data. The new tool is expected to reduce the risk of non-payments, in turn result in increased profitability. The new strategy is anticipated to make the company stand ahead of its competitors, and to avoid government intervention in the future.

Road ahead

United Kingdom is not the only country raising concerns for protecting consumer’s interest. The trend is also spreading across the world. Singapore and Australia are also highlighting the need for measures to be implemented for credit check in BNPL market. PayNXT360’s expects that the BNPL market is moving towards a highly regulated BNPL market in the short to medium term perspective.