Balancing risk: Modern architecture’s role in the BNPL playbook

Buy now, pay later (BNPL) is an old form of payment that is new again in a big way. And that could mean trouble for BNPL fintechs that are just getting to know the world of lending and the pitfalls associated with traditional banking infrastructure.

Recent data from FIS — one of several payment processors — pegs BNPL at a $100 billion industry, or 2.1% of global e-commerce transactions. Marqeta, another processor, says BNPL transactions on its platform have increased 350% this year.

The success of the BNPL format has been attributed to the lift it provides to merchants at checkout and the convenience it offers consumers seeking to avoid interest payments and debit card fees. Last year, at least 91% of consumer loans in California were BNPL.

According to Klarna, one of the largest BNPL providers, the average order value at checkout increases by as much as 45% when shoppers are given the opportunity to pay for their purchases in four interest-free payments. BNPL is so convenient, compared to old-fashioned installment loans, that consumer advocates worry it encourages people to take on more debt than they can manage.

If that happens, the BNPL providers could get hurt badly during an economic downturn. In a report published in the summer, Fitch Ratings, one of the Big Three U.S. credit rating agencies, described the performance of BNPL debt as “opaque.” The report cited a survey in which nearly one in three respondents (31%) had either been late with a BNPL payment or incurred a late fee.

But the other side of BNPL is not just consumer credit risk, which BNPL providers say they can manage with non-traditional, data-driven underwriting. BNPL providers also face a double whammy of risk on the merchant side.

Three-sided loans, in which a lender relies on a merchant to act as a reseller, became a focus of regulatory scrutiny with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.

Dodd-Frank did many things. Among the most influential provisions was the creation of a Consumer Financial Protection Bureau endowed with the authority to act against any provider of consumer financial products or services who engage in “any unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”