The FCA has noticed, and it remains to be seen if the BNPL sector will be regulated – which leaves BNPL lenders with a tricky trade-off to manage.
BNPL providers may well have to follow the same rules as other UK lenders and make more detailed analysis of what customers can afford what they are buying. That probably means affordability checks being incorporated into the lending journey.
On the other, friction is the enemy of online sales – especially lower-value sales. You’ve filled your online basket and are ready to buy. At this point, frustration grows by the mouse-click. If this involves more checks prior to sale, then it’s more likely that you will abandon the journey. BNPL lenders have ambitious growth targets that can’t afford friction.
So how can BNPL providers grow both strongly and responsibly in this new environment? How can they treat customers fairly without increasing dropouts? And how can they minimise their own credit risk, especially as BNPL moves into bigger-ticket items such as furniture and holidays?
At Experian, we’re already working hard with BNPL providers to walk this tightrope. We have identified five key issues that lenders should be considering as they prepare for possible regulation.
1. Proportionality: it’s unlikely any regulation will demand a sledgehammer to crack a nut
A fundamental principle outlined in the Treasury consultation on BNPL regulation is proportionality. The rigour of the safeguard should be proportionate to the individual circumstances of each case.
And BNPL lending is relatively low risk for most consumers:
- Many products are interest-free – the cost of the product to the consumer is low.
- The sums available on BNPL, though growing, remain relatively low: in the UK, the average single transaction is £65 to £75, though clearly there could be multiple transactions across several lenders accrued in a month.
- Unsecured lending may well only need relatively simple safeguards – checks using compliant bureau data that lenders can add to the customer journey with minimal friction. These checks can be used to understand risk, affordability and consumer indebtedness, prior to purchase.
2. Going bespoke: no single product will suit every lender
The BNPL market is getting increasingly varied. Although the average BNPL spend in the UK is still low, more and more customers are using it to pay for big-ticket items like holidays.
Therefore, there is no single source of credit-risk or affordability data that suits everyone. Experian provides a range of different data sources that includes credit scores, bureau affordability metrics and Open Banking that can be tailored to suit a lender’s individual requirements. The solution is therefore infinitely flexible.
3. Avoid overload: Too much risk information can be as big a problem as too little
Showing the regulator that you have lent responsibly does not mean you need every single detail of a consumer’s financial life. Indeed, asking consumers to share more data than is required to inform their credit worthiness is also a step too far.
Although we await details of the precise guidance, it seems likely that under the principle of proportionality, less-invasive and lower-friction alternatives such as simple bureau checks may well suffice.
Proportionality is essential for customers, not just regulators. For instance, would we share Open Banking details to get credit for a new pair of shoes when bureau affordability checks will do?
Open Banking may be appropriate where there’s a higher-value ticket item or where a customer’s credit score might suggest greater risk and vulnerability. However, it may be best used outside the purchasing journey.
GDPR is a crucial consideration too. Lenders need to show they do not hold more information than required for their stated purpose. Being able to justify what data was collected and why is therefore a significant consideration.
4. Start with credit risk: Assessing credit risk with the best data
Some BNPL lenders use credit-risk scores from credit bureaux already. But others rely only on checks using public information – such as records of County Court Judgements.
Experian research suggests that using shared bureau data is much more effective. By drawing on information shared by an unrivalled range of financial institutions, we can help data BNPL providers identify 40% more consumers who have shown signs of delinquency in the past two years.
By building bespoke scores – using the financial characteristics that matter to BNPL lenders, with an appropriate outcome period – we have increased the predictive power of our standard models by 45%.
5. Low-friction affordability checks
We’re working with lenders to build high-power, low-friction affordability checks, which fit seamlessly into buyer journeys. In a four-step process we:
- Listen, to understand BNPL lenders’ unique needs fully.
- Use our unrivalled experience of building compliant models.
- Work with lenders to build bespoke compliant affordability metrics – based on our 280 different data variables – that provide maximum predictive power, minimise friction, and show regulators that lending is fair to the consumer.
- Support lenders on the best use of bureau and/or Open Banking in the purchasing journey to inform the risk and make the best decision for the consumer and the lender.