The global payments industry continues to evolve at breakneck speed. After rebounding from the pandemic faster than most anticipated, the sector is now predicted to double its market value by 2024.
The rapid uptake of Buy Now, Pay Later (BNPL) propositions, particularly within the retail sector, continues to drive major growth and new opportunities for payments firms. The flexibility that BNPL schemes offer has completely transformed the market, particularly for younger shoppers, who are happy to trade traditional credit cards for more user-friendly BNPL schemes.
However, as it stands, many individual payments firms are struggling with profitability because the industry has evolved so quickly that back-office processes, such as reconciliations, are largely unequipped to match the growing capabilities of the front end – and the changing regulatory landscape.
The regulatory grey area
The BNPL lending market is coming under increased pressure. It occupies a precarious position – caught between cutting-edge innovation on one hand and a regulatory framework that has struggled to keep pace on the other. As a result, many payments firms are currently operating in a regulatory grey area.
Policymakers are understandably concerned that this form of lending does not offer adequate levels of protection to consumers and more seriously, is contributing to a rise in personal debt. Research shows that 10% of UK consumers who utilised BNPL in 2021 were already overdue in credit repayments, while two-thirds of US consumers were already at 75% of their credit limit when making BNPL purchases.
In early 2021, the UK’s Financial Conduct Authority (FCA) recommended that BNPL providers should fall under the umbrella of consumer credit regulations as ‘a matter of urgency’ due to the ‘significant potential for consumer harm’ caused by unregulated transactions. The Treasury has also said that payments firms offering BNPL can expect to gain authorisation as credit brokers if they continue to provide this service.
The introduction of similar regulations has also occurred across the EU and in the US. Following a series of recommendations made in early 2021 on the consumer risks of BNPL, the US Consumer Financial Protection Bureau (CFPB) instructed the five biggest BNPL companies – Affirm, Afterpay, Klarna, PayPal and Zip – to begin providing comprehensive data on transactions, underwriting procedures and credit checks. By the fast-approaching second quarter of 2022, these firms must hand over these details in what is being described as ‘the boldest regulatory move yet against the fast-growing sector’, according to journalists at the Financial Times.
How does this impact payment firms?
In an era of unprecedented competition and cutting-edge innovation, success will largely depend on the strength of payment firms’ technological infrastructure to overcome these impending challenges, whilst continuing to differentiate themselves from competitors.
Regulatory developments are always a challenge, requiring firms to interpret requirements and adapt processes accordingly.
However, the payments industry is so dynamic and fast moving that incoming regulations will pose a particular challenge to BNPL firms, as policies will likely go through multiple iterations before they’re finalised. Outsourcing this reconciliation will come at a huge benefit to firms who simply don’t have the inhouse resources to carry out this process accurately and efficiently.
Our primary recommendation to payments firms this year is to push for the end-to-end automation of the reconciliation life cycle. Only then will they be able to manage the burden of the rapidly evolving regulatory landscape, efficiently handle large data volumes, operate in real-time and achieve operational efficiency when working across borders.