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Is it time to rethink your buy now pay later (BNPL) business model?

In recent years, the highly successful “buy now, pay later” (BNPL) embedded finance market has experienced huge growth, and now stands at more than $100 billion. It is expected to grow by 45% CAGR to reach $3.6 trillion by 2030. According to the UK Financial Conduct Authority, BNPL quadrupled in the UK in 2020 alone.

Fintech companies like Klarna and Afterpay, technology giants like PayPal and Apple, retailers, and traditional consumer finance banks have all been scrambling to launch BNPL products and acquire a share of this fast-growing market.

All market participants benefited significantly during BNPL’s boom. Consumers were able to spread out the cost of their purchases using interest-free installment models. Retailers benefited from increased transaction volumes which drove revenue that more than offset the credit and financing fees. Banks and retail finance partners were able to acquire new, younger customer segments. Additionally, with low default rates during boom times, banks were willing to accept the lower margins on BNPL products compared to traditional lending products.

However, that was then, and this is now. We find ourselves in a dramatically different economic environment, and some industry commentators argue that BNPL models are likely to suffer due to cost-of-living pressures and increased regulatory scrutiny.

Some point to the troubles caused by major players such as Klarna. Our observations from previous stagflation cycles suggest that evolution will be paramount for survival, which will require a shift in the business model from a pure growth model to a smarter, more efficient one.

With stagflation looming, pressure points are already evident that will force an evolution in the market. Players must quickly adapt their commercial and operating strategies. Consumers faced with staggering cost of living increases are more cautious with spending and default rates are on the rise. Retailers must carefully adjust their financing solutions (including BNPL products) to the preferences and affordability needs of these consumers. Banking partners will need to conduct more detailed credit checks and tighten the conditions for certain segments. Finally, being transparent about cost — particularly for late payment fees and other conditions — is paramount, because regulators closely scrutinize the behavior of retailers and credit providers.

With stagflation looming, new pressure points are forcing an evolution in the BNPL market.

Players must quickly adapt their commercial and operating strategies to survive.

The key to survival is to continue delivering frictionless and affordable experiences to consumers. To ensure the commercial viability of your BNPL model in times of stagflation, you need to:

  • Optimize your channel partner strategy
  • Leverage extended customer data for origination and to provide personalized offers
  • Automate front-to-back processes
  • Create personalized segment and customer risk profiles
  • Practice smart collection to limit bad debt and write-off
  • Ensure that your platforms are scalable (both up and down) and highly efficient

Consumer finance providers need to evolve their embedded finance products and services, particularly tactical solutions that were deployed during an era of rapid growth. Atos has the technical and financial services expertise to help you evolve your operating model for whatever the future holds.

We recently designed a new SaaS BNPL platform for a leading European financial services company, enabling it to launch low-entry products and scale out new use cases. Our domain expertise, platform capabilities and banking ecosystem were critical to create the solution.

 

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About Kuldip Chiheru
Global FS S&BD Head
Kuldip Singh Chiheru is Head of strategy in Global Financial Services at Atos. Kuldip has been with Atos since 2008 and his particular area of focus is in the lending and loans division looking at how technology can improve this function for our commercial banking customers and for the sector more generally. Prior to this he worked in the Financial Sector advisory team at KPMG and has also worked for ICAP and HSBC Midland International Banking.