CEO of Zopa: regulation at the heart of BNPL 2.0

Following an explosion in the use of BNPL (buy now, pay later) in recent years, transaction volumes are expected to reach $680 billion globally by 2025.

In the UK, for example, use of the service nearly quadrupled in 2020 to £2.7 billion (about $3.6 billion) in transactions, according to data from the Financial Conduct Authority (FCA). – estimated to be worth £5.7bn in 2021 – prompting calls from lawmakers for urgent regulation to prevent consumers from taking on more debt than they can afford.

Read more: UK lawmaker calls for urgent regulation of Buy Now Pay Later providers

These calls culminated in a public consultation that set the plans for the regulations last year. This month, the UK government announced plans to tighten regulations around interest-free BNPL credit agreements.

See also: UK closes BNPL consultation, eyes new regulations in 2022

Under the new rules, lenders will have to be approved by the FCA and will also have to carry out financial capacity checks to assess consumers’ ability to take out loans – a move Jaidev Janardana, CEO of UK challenger bank Zopa, has welcomed into a new era of BNPL 2.0 centered on regulation and consumer protection.

“[With this] option, we are helping to solve the client’s need, which is about compartmentalizing the purchase and repaying the debt, but at the same time, it doesn’t have some of the negative aspects that current versions of BNPL have,” said Janardana told PYMNTS in an interview.

Learn more: BNPL rethinks model as tough times strain client portfolios

One of the drawbacks of the current BNPL model, according to Janardana, is that customers’ credit scores are negatively affected when they miss a payment. However, responsible BNPL borrowers are not able to build their credit rating in the same way as if they were using a credit card, for example.

On the lender side, the lack of reporting to credit ratings has allowed clients who have already accrued debt elsewhere to continue to take loans from other BNPL providers without knowing their creditworthiness.

That’s why Janardana said the government’s announcement is in line with the enhanced offering Zopa is looking to deliver to consumers, having recently made its foray into the country’s BNPL space: “We believe we are very aligned on the direction of travel.”

Related: UK BNPL regulation unlikely before mid-2023

Longer and bigger loans

To date, the BNPL market has been characterized by short-term and modest buying, which Janardana believes can negatively impact earnings growth.

“It’s very difficult [for] buy now, pay later businesses to make money, because the saving doesn’t add up for the small bills. They do that for bigger tickets like ours, but for smaller ticket sales it’s very difficult to make that effective,” he explained.

See also: British digital bank Zopa unveils its BNPL offering

That’s why the London-based digital bank is instead offering longer, larger loans between £250 and £30,000 (about $307 and $37,000). These loans give customers the opportunity to have long-term utility, whether it’s for a computer, a washing machine or perhaps a kitchen replacement, he said – not to mention the opportunity offered by larger tickets in terms of building a longer and more meaningful relationship. with customers.

Read more: UK digital bank Zopa launches hybrid savings

But despite the strong growth the sector has seen in recent years, Janardana said he does not expect BNPL to become the company’s dominant product. Instead, he sees it as part of efforts to diversify the range of credit and financing options Zopa can offer customers.

“There are people who will use our credit cards to make a purchase because they know they can pay in full or they may want more flexibility rather than having equal installments,” he said, adding that “all of these customer preferences are valid and we need to have a range of options, [including BNPL]to meet these needs.

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NEW PYMNTS DATA: THE CUSTOM PURCHASING EXPERIENCE STUDY – MAY 2022

About: PYMNTS’ survey of 2,094 consumers for The Tailored Shopping Experience report, a collaboration with Elastic Path, shows where merchants are succeeding and where they need to up their game to deliver a personalized shopping experience.

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