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Buy Now Pay Later – selecting technology to meet new regulation

Buy Now Pay Later (BNPL) providers have enjoyed phenomenal growth across the world over the last few years. Just from the firms surveyed by the Financial Conduct Authority (FCA), the total value of BNPL transactions between January to December 2020 was £2.7bn and is expected to grow rapidly by 2024.

Flexible payment options at the Point-of-Sale (POS) have become almost standard in online transactions, whether the purchase is a pair of trainers or a treadmill. No surprise then, that the regulators have been running to keep up. The "Regulation of Buy Now Pay Later" Consultation has just launched to establish the parameters of new BNPL regulation.

If you are looking to launch your own BNPL offering, you will rightly be considering the impact of these regulations on the BNPL technology that you choose. Those who read our article in Finextra will remember that we made several predictions about the size and shape of regulation to come.Let's review what should be in your BNPL systems now we have the Consultation document.

HM Treasury Consultation…

It was the Woolard Review (a review of change and innovation in the unsecured credit market) that recommended "as a matter of urgency" that the FCA should bring BNPL products within the scope of regulation.As a result, the "Regulation of Buy Now Pay Later" Consultation opened on 18 October 2021 and concludes on 6 January 2022. What clues do we get from the consultation and how does it compare to our predictions?

Our Predictions…

We noted the obligations already in the FCA Handbook for BNPL firms, like those under Consumer Protection law and many elements in consumer credit regulations which were being applied to BNPL. These included financial promotion rules, avoiding incentive schemes that could trigger conflicts of interest, and providing choice to the consumer at the point of purchase. The Consultation has focused on those financial promotion regulations with a view to applying them carefully to BNPL transactions.

Then we focused on the areas where automation could be needed to deliver compliance and we looked at key parts of the BNPL process:

Pre-contract Real-time Checks

The Consultation paper states that BNPL has the potential to create high levels of indebtedness. So, providers should make it clear to consumers, at the point-of-sale, that they are taking on debt, encouraging buyers to consider their purchase carefully and their ability to satisfy any borrowing commitment over the number of months allowed.

How does this influence your technology selection? The Consultation notes that there is limited transactional "friction" to give the consumer time to consider their actions.Good for consumer experience but not good for consumer protection. To ensure compliance with potential regulation, automated systems should still guide the buyer gently through the process but impart information and gather sufficient data along the way, online and in real-time, to enable checks to be made via national databases to confirm identity and properly assess affordability risks.

The Consultation notes the absence of up-to-the-minute Credit Reference Agency information (as BNPL credit is fast-moving and short term) and their plan is to work with CRAs and BNPL providers to find ways to bridge that credit-data gap. We believe that Open Banking is also part of the solution.

An automated Open Banking process, at the point-of-sale, may add a little friction but it enables the consumer to authorise the BNPL provider to access their bank account, specifically to run an automated check of their income and outgoings to assess the affordability of additional credit. This, together with automated ID and credit checks, could provide a compliant, comprehensive decision-making tool for responsible BNPL providers, and comfort to regulators.

Integrating retailer and BNPL provider's systems

Minimum friction, speed and ease of service, remains key to BNPL's growth, so these checks need to be effective and run in real-time. Retailer/merchant and BNPL provider systems need to link seamlessly to ensure a good customer experience. When selecting technology, consider how those accessing the system, will get to their desired outcomes and how you will ensure that each party receives/imparts the information needed at the right point in the transaction. We can see from the Consultation document that this will be scrutinised by the regulators but they are not looking to regulate the merchants themselves, so the role of compliance will remain with the BNPL providers.

Compliance can be achieved through smart integration. The Madiston system, for example, uses "Profiles" to ascertain the route that meets each user's requirement. Different Profiles such as "retailer", "merchant" and "consumer" can be established with different settings to define their journey through the system.This gives ultimate flexibility to the BNPL provider, easy to set up and ensures compliance in operations.

This system addresses concerns expressed in the Consultation about consumer understanding by showing those with the profile of "consumer" appropriate mandated warnings which would potentially include pre-contractual risk warnings, key terms of the arrangement and what happens if they can't meet their obligations to the BNPL provider.

One of the areas highlighted in the Consultation document is that "the BNPL model tends to rely on a larger number of lower value purchases. This may make it more challenging for consumers to keep track of their credit in aggregate, for example where individual repayments are due. "Providing automated reminders, triggered at the right time and providing consumers with meaningful information about their levels of commitment before, during and post-transaction will all be important from a consumer-protection compliance perspective.

In-built automated payment processing

Whilst not an element within the Consultation, this is a key decision for those purchasing BNPL systems so we have included it here. This is a topic worthy of a blog of its own so watch this space.

We have found that Payment Processing is almost always thought of as a "mandatory bought-in service from a specialist company". But why dilute the already tight margins by giving away more funds to external providers? Why not look for a system that will enable you to do compliant payment processing in-house?

With the great strides in Open Banking, direct Account to Account (A2A) payments are becoming more prevalent but, even using the old banking systems, automated compliant payments processing is available, with no added cost per transaction. Look for technology solutions that include automated, secure faster payments or A2A payments within their system and save yourself some money.

Automate the full BNPL lifecycle

Give the back-office processing as much attention as the front office – it is where you will make your profits if you get it right. The back-office function can be costly unless your system works as an integral part of the team, carrying more than its share of the workload.

The Consultation goes on to look at Treating Customers Fairly – particularly when in arrears or default. By automating as many processes as practical, not only do you ensure a consistent fair approach for all customers, but the software can carry the heavy load of managing the many, many variables that occur beyond the point of purchase. This means fewer people are required to manage customer accounts.

Repayment reminders, allocation of payments and repayments, failed and penalty payments, interest and fee calculations, reconciliations, changes in instalment plans, incentives, notices of sums in arrears, debt recovery and more, can all be automated, reducing the need for armies of operations staff. Showing regulators that all these processes are in place and reliably executed, will be key to your organisation's safe growth.

Choosing a highly automated BNPL lifecycle processing system will not only satisfy regulators that each customer is being treated fairly but, importantly, reduce costs and so deliver profitability to your organisation that much faster.

Corporate and regulatory reporting

When the Consultation concludes and regulation is imposed, BNPL firms will need to demonstrate that their systems are up to the job. Obviously, automated systems will provide evidence that processes are robust, controls are impervious and reporting structures are quick and transparent. Audit trails and banking-level security such as dual approvals should all be available in the BNPL technology you select.

But what about from an internal management perspective? You will want to monitor and measure the business coming through from each retailer or sponsor. The technology you select needs to be capable of analysing these partners as you wish them to be assessed – slicing and dicing the data as you need it presented. Having flexibility in your reporting capability, will enable you to provide proof to the regulators, and garner meaningful information for your management teams.

All parties involved, including consumers and retailers, will be looking for transaction data from their perspective too. Providing detailed digital dashboards for everyone, has to be part of any good system.


Conclusion…

The Consultation recognises the value of BNPL to consumers, providing choice at the checkout and helping to spread the payments of high-cost purchases without resorting to high-cost credit.The tone of the Consultation is proportionate and they are keen not to stifle the industry. But nevertheless, regulation is coming and that is the right way to go to protect consumers whilst letting the industry develop safely.

You only have to look at the eye-watering valuations of existing BNPL providers, that there is an appetite for this type of credit firm and we expect to see more business models emerge over the coming years.

The key to setting up this type of business successfully is robust technology that is flexible enough to drive compliant business processes as your business model evolves.

The "Regulation of Buy Now Pay Later" Consultation looks at regulation already present in other forms of credit - so fast, robust systems with POS BNPL technology running on the tracks of credit processing systems with in-built regulatory compliance, will ensure you are prepared for future regulation.

If you are considering adding Buy Now Pay Later to your existing services, or launching as a new provider, then talk to us. The Madiston Platform should be on your short list for BNPL technology.

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