Buy Now Pay Later (BNPL), which focuses on no-interest short-term loans, became popular during the COVID-19 outbreak. In markets around the world, it continues to be widely used as it offers new opportunities for merchants, issuers, card networks, and customers who limited access to conventional credit.
There are enormous opportunities in BNPL, as evidenced by recent launches from businesses like Apple, NatWest, Santander, and Zopa as well as new products from those already active in the market, like PayPal. Major players are currently concerned about the possibility of increased competition.
Cross-border BNPL is still a significant untapped market, though. Financial service companies entered the market and changed the debt landscape by globalising BNPL, which caused a wave of adoption among businesses.
There are currently more than 150 BNPL providers worldwide. These businesses are a sizable presence in the payments space, including occasionally for cross-border payments. They collaborate with merchants to offer a range of BNPL services as a payment method at checkout.
Intriguing opportunities are offered by short-term instalment loans at every level of the payments ecosystem, but there is risk involved, as there is with most financial opportunities. Before investing in the infrastructure required to support BNPL payment options, merchants must take these risks into account, especially those that conduct business internationally and in multiple currencies.
Banks can apply BNPL strategies in a variety of ways to their operations. Let’s examine the size of the opportunity, the factors driving its rapid expansion, and the options available to banks looking to enter this market.
Cross Border BNPL – The Future is wide open
Customers find the term Buy now, pay later (BNPL) more appealing and it is a growing trend that’s upending the credit sector. Fintechs have been working hard to provide BNPL options for both physical stores and e-commerce purchases. Customers’ needs are the focus of BNPL’s convenience and personalization offerings.
By 2028, BNPL is expected to increase from $4.1 billion to $20.4 billion. In many markets, particularly Scandinavia, the UK, the US, and Australia, it is now considered a “must-have.” Its presence in the EU is expanding quickly, led by nations like Germany, Italy, and France.
The adoption of BNPL has initially been assessed in e-commerce, but Fintechs are quickly expanding into in-store payments. As more businesses join e-commerce marketplaces and traditional consumer goods companies start selling directly to customers, the adoption (and expectation) of BNPL has accelerated even more.
Ascent’s 2021 survey shows that 62% of users think BNPL could replace their credit cards. Credit card volumes might continue to decline as BNPL adoption increases. According to Payments Journal, three of the biggest banks in the US reported a decline in credit card purchase volumes of more than 20% in 2020 alone.
BNPL is well-liked by people of all ages. Over 40% of consumers in the 55+ age group have also used BNPL, though younger consumers are more likely to continue with the most convenient form of payment.
The fact that BNPL is still being used shows that, when done properly, it can be a workable, profitable, and win-win payment choice. Merchants must control their exposure to the risks while making sure they gain from the large upsides.
The Cross-border Buy Now, Pay Later (BNPL) industry is under a lot of pressure due to various environments which we will see in detail in the below section, but there are unquestionably still huge opportunities in the sector.
Risks & Challenges in Cross Border Buy Now Pay Later
1. Global Economic Dynamics
The world economy experiences both growth as well as decline. Many BNPL providers are financially strained due to increased inflation, rising interest rates, the potential for a recession, and increased competition. To deal with increased competition, these BNPL businesses will find it more expensive to obtain loans to fund their operations as interest rates rise.
Several large BNPL providers have made layoffs because of poor earnings and stock market performance, and regulations have started to tighten as the industry comes under more scrutiny.
The impact of a significant shift in the economic climate, such as a recession, on BNPL, cannot be foreseen because it is still relatively new.
2. Local Regulatory Challenges
The more regions you choose to run a business in, the more regulations you must consider to protect yourself and your customers from fraud while also avoiding fines and lawsuits.
BNPL providers must abide by payment network regulations from various regions, including displaying payment cards, the need for transaction-related receipt data, and the open disclosure of return and refund policies.
Businesses’ tax obligations depend on several variables, including sales volume, transaction volume, and location of sales. In addition to the local tax laws, the choice of payment model matters.
To facilitate cross-border BNPL eCommerce, it is necessary to simplify the regulations that support international payments. It is vital to design and adopt regulations that address all significant obstacles at once and make sure that solutions are compatible across national boundaries.
3. Risk of Defaulters
In this BNPL business model, a customer makes the first instalment to receive a product and then makes weekly or monthly payments throughout an agreed-upon period (typically three or six months). Although many BNPL contracts completely waive fees, interest, or late fees.
A short-term financial agreement with a lower regulatory threshold comes with some clear benefits, such as high customer approval rates and flexibility in contracts and agreements. The drawback is that lower standards and higher approval rates increase the possibility of default. Where does the merchant stand if a customer passes the soft inquiry for approval, pays the first instalment, receives the good or service, and then vanishes?
Default risk is not specific to BNPL. A stricter approval process and complicated regulatory infrastructure should be in place to reduce defaults and ease asset recovery to manage the loss.
4. Managing Cross-border risk profiling and creditworthiness
Banks and other BNPL providers should come up with and use policies and procedures to reduce the risks they found in their risk assessments. Customer due diligence (CDD) processes should be made so that the institutions can learn more about their customers by making them find out what they do and why they need services. The first steps of the CDD process should be made to help banks figure out the ML/TF risk of a proposed business relationship, decide how much CDD should be done, and discourage people from setting up a business relationship to do something illegal.
Banks and othert financial institutions should be able to make a customer risk profile by taking a whole-picture look at the information they get when they use CDD measures. This will help the insitution decide whether to start doing business with the individual or the company, keep doing business with the company, or end the relationship. Risk profiles can be used for each individual customer, or they can be used for groups of customers who have similar traits. For example, customers with similar income ranges or who do similar types of banking transactions.
This is a good way to deal with retail banking customers in particular.
Initial CDD includes: identifying the customer and, if applicable, the customer’s beneficial owner; verifying the customer’s identity using reliable and independent information, data, or documentation to at least the extent required by the applicable legal and regulatory framework; and understanding the purpose and intended nature of the business relationship and, in higher-risk situations, getting more information.
BNPL players can efficiently manage cross-border risk profiling and creditworthiness across territories, unlike incumbents.
Like KYC, credit checks are also more complicated when they involve other financial systems and need to be included for every country that the company supports.
Many BNPL providers consider this possibility and supply remedies to lessen the risk. Collaborating with an experienced partner on strategy and implementation is essential because these solutions will differ depending on the provider.
5. Handling Currency Exchange rates in Cross Border BNPL
Currency exchange rates are one of the biggest worries for multinational retailers using BNPL. As opposed to conventional credit, these point-of-sale instalment loans have no provision for absorbing changing currency exchange rates. When conducting cross-border transactions, BNPL may implicate merchants in the risk of the foreign exchange markets.
For instance, a merchant may use a different currency to conduct a cross-border BNPL transaction. After a few months, the currency is no longer worth what it did when the agreement was first made, and the final instalment is then due. Who pays for that expense? Also, is the retailer responsible for the added cost if the customer returns an item that is now worth more than they paid for it because of currency exchange fluctuations?
Cross Border BNPL – Pushing Banks into innovative water
Banks are currently experimenting with a variety of strategies to seize the opportunity presented by BNPL. While some are developing models that enable them to run in the background behind BNPL propositions or utilise other players to create differentiated offers, others are offering one-to-one models with specific merchants.
Additionally, some industry observers claim that pressure from fintech companies is at least partially behind bank-led innovation on cross-border payments as banks make technology investments to meet client demand.
With the existing structure and trust consumers place in banks over Fintechs, banks are a viable disruption candidate in BNPL
To compete in the BNPL market, banks must prove they can provide the secure, convenient, and reliable payment options that consumers demand. The most prosperous will be those who act quickly and leave an impression on customers.
Banks must decide whether or how they want to enter this market as BNPL continues to grow. Those who choose not to take part or who delay too long in doing so run the risk of being cut off from a growing value pool and limiting access to a generation of customers with various credit needs.
Most of the FinTech BNPL providers can operate within their zone, while banks can widespread their BNPL offerings across borders due to their existing tie-ups with regional banks to offer other services such as cross-border payments.
Considering how to take advantage of current strengths may be the secret to success for those prepared to challenge Fintechs’ dominance in the market.
- Collaborate to develop differentiated products – Collaborating with BNPL players and regional banks across borders enables banks to capitalise on their long-established strengths and wealth while diversifying into innovative credit options such as short-term microloans.
- Offer BNPL via credit cards at POS – Banks can tie -up with merchants and vendors to offer BNPL options via credit cards at POS. This could be a huge market as consumers are looking for more offers in various sectors.
- Buy or build their platform – Banks can build their BNPL platform or buy BNPL products available from the market to offer services to their customers. Banks may be able to reduce these costs more effectively because of their experience able to operate in regulated markets and providing low-cost payment models.
Buy Now, Pay Later segment will face significant regulatory headwinds, with various regional regulators calling for BNPL products to be subject to the same lending criteria as other credit products such as loans and credit cards.
Many BNPL players currently make a “soft call” on an applicant’s credit history or rely on self-certification for smaller purchases. Banks, on the other hand, typically have strong relationships with their customers that span multiple products, allowing them to make quick, accurate and data-rich decisions about a customer’s creditworthiness.
The bottom line is the trust that banks have in their customers, combined with their in-depth understanding of spending patterns and credit histories, opens the door to new, innovative products in BNPL.
Talk with our industry experts to learn the strategies and plans on how banks can acquire cross-border BNPL opportunities.
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