Flexible payment options, including Point-of-Sale (POS) "Buy Now Pay Later" (BNPL) offers, are growing in popularity at a pace that regulators are struggling to match.

The Woolard Review (a review of change and innovation in the unsecured credit market) noted that the value of BNPL transactions has nearly quadrupled during 2020.  According to a recent survey of consumers conducted by the Financial Conduct Authority (FCA) in December 2020, 11% of consumers, some five million individuals, had used a BNPL product since the start of the Covid-19 outbreak.

Regulation is coming...

This BNPL growth has led to the recommendation in The Woolard Review that "as a matter of urgency" the FCA should bring BNPL products within the scope of regulation."

There is no doubt that this is the right move, to protect consumers, help the industry grow safely and protect the retailers and BNPL providers offering this increasingly popular service.

...and with it, change, so how do you select the right technology for BNPL now?

BNPL, used wisely, is a hugely valuable tool for consumers, helping to spread the cost of lumpy purchases without resorting to high-cost credit options.  The risks, however, must be mitigated by robust technology that drives compliant business processes, performed online at the point-of-sale between retailer, consumer and platform.

Anticipate the type of regulation that the FCA may impose

There are already obligations in the FCA Handbook for BNPL firms, like those under Consumer Protection law and many aspects already included in consumer credit regulations are now being applied to BNPL.  For example, rules on appropriate financial promotions, conflicts of interest within incentive schemes and the range of options open to the consumer at the point of purchase.

Focus on the areas where most of the costs reside - back-office processing

As ever, the processing systems will be scrutinised to ensure they protect the consumer.  Many retailers and BNPL providers may be regulated already because they offer other credit services so they may be aware of the likely regulation to come.  As a result, they may use software like Madiston's, that provides Point-of-Sale BNPL technology as part of the complete back-office processing suite, with compliance built in.  This gives them the tools they need to be ready for regulation when it arrives.

For firms looking to expand their existing services with BNPL or start-ups looking to launch a new BNPL service, let's look at some of the key areas where technology can carry the load:

Real-time checks: ID verification, Know Your Client (KYC), Anti-money laundering (AML), credit history and affordability

The chances are the regulation will start seeing BNPL for what it is - a short term loan.  So, it should be clear to consumers, at the point-of-sale, that they are taking on debt, so they consider their ability to meet that borrowing commitment over the months agreed.  Technology can guide the buyer through the process gathering sufficient data, online and in real-time, to enable checks to be made via national databases to confirm identity and assess affordability risks.

In the absence of up-to-the-minute Credit Reference Agency information (as BNPL credit is fast-moving and short term), Open Banking may be the answer.  With an automated Open Banking process, at the point-of-sale, the consumer gives permission to the BNPL provider, to access their bank account to run an automated check of their income and outgoings.  This could provide sufficient affordability information that, when combined with other data like automated ID and credit checks, gives the responsible BNPL provider a better decision-making tool.

Integrating retailer and BNPL provider's systems

Speed and ease of service is key to BNPL's growth, so these checks need to happen in real-time to be effective.  Seamless access between retailer/merchant and BNPL provider systems is key to delivering a good customer experience and most good technology providers will have simple solutions for this.  The Madiston system, for example, uses "Profiles" to determine the type of participants, such as retailer, merchant and consumer, defining their route through the system, according to the settings in their profile.  This makes it easy to set up and flexible to operate.

In-built automated payment processing

Payment processing is often regarded as an external process, a service provided by a specialist company but that dilutes the slim margins available to BNPL providers.  Look for technology solutions that include automated, secure faster payments within their system.  Those working with Open Banking may also be able to provide A2A (account to account) processing.

Consider all the automation needed to deal with the full BNPL lifecycle

We've talked about onboarding and regulation but there is so much more beyond the point of confirming the BNPL agreement.  Like any credit arrangement, there are a million variables beyond the point of confirmation.  Automated repayment reminders, debt collection processes, allocation of payments and repayments, failed and penalty payments, interest and fee calculations, reconciliations, incentives and more.  The system you choose should have full BNPL lifecycle processing which is highly automated so that you minimise the number of operations staff needed in the back office.  Where there are gaps in the system, you need to add people so remember to consider long term cost savings not just the level of short-term investment.

Corporate and regulatory reporting

There will be a requirement to monitor and measure the business coming through from each retailer or sponsor so the technology you choose should be capable of segmenting and rolling-up these partners as you wish them to be analysed.  This flexibility in the structure of the system will enable you to gain meaningful management reports.

As regulation is introduced in this area, your POS BNPL system will also need to operate with full audit trails, providing evidence of treating customers fairly (TCF) through automated compliant systems and banking-level security such as dual approvals.  This should come as standard within good systems.

For the consumers and retailers, you will also be looking for detailed dashboards for each so they can see the transactions data from their perspective too.

In a nutshell...

You will be looking for speedy, robust systems with POS BNPL technology running on the tracks of credit processing systems with in-built regulatory compliance.

We think the industry should look forward to regulation for the trust and credibility it affords responsible, ethical providers.  The Point-of-Sale, Buy Now Pay Later market has much to offer consumers globally, with its rocketing forecast trajectory.