We established the basics of BNPL (Buy Now Pay Later) in the last post. In this part, we will share tips on building a BNPL product and insights into its future.
Points to consider when building a BNPL product
Maintain secure transactions
The key to protecting BNPL payments is to be proactive in preventing fraud and to have real-time payment transaction data. The development team should consider security at every step of the development process, for example by building different layers to protect user data. It’s also important to watch for data inconsistencies when a user is registering or making payment (e.g. is the phone number associated with the user? Does the billing information match the user’s credit file?)
Provide convenience to users
To ensure that people are willing to transact through BNPL, the product has to be easy to use. At least, it should not be more complicated than using a credit card. This requires merchants and e-commerce platforms to inform consumers that the BNPL option is available as early as possible in the purchase journey and provide fast verification.
These days with more players joining the BNPL market, companies are coming up with newer and convenient methods of repayments. For example, Paypal provides Pay in 4 allowing consumers to split purchases between $30-$1,500 into four interest-free, bi-weekly payments without the hassle of late fees. Compared to traditional BNPL, it provides a payment plan by default and consumers don’t have to worry about interest and late fees if they miss the repayment due date.
Control risk
Risk control is at the core of BNPL. Typically, BNPL service providers do not access the bank credit reporting system but actively use big data, AI and other technical ways to analyze the information provided by users. For new accounts, to avoid fraud and make correct credit decisions, BNPL institutions should implement a rule-based risk assessment with live data, which includes email address, IP address, BIN and phone number. They should constantly enrich available data to improve their bad debt rate. For existing users, shopping preferences and past purchase behavior on the platform can be taken into consideration as well.
Integrating open banking data can also help to make the transactions secure. As long as the organization meets the requirements, it can get data from open banking through API integration. The data includes account holder data, residential address, financial liability information, transaction codes or activity codes, etc.
Update on BNLP regulations
In recent years, regulatory bodies around the world have introduced new regulations which have increased operational costs.
Key examples include an investigation order in 2021 by the U.S. CFPB (Consumer Financial Protection Bureau) to five BNPL service providers – Affirm, Afterpay, Klarna, PayPal and Zip – requiring them to provide platform business patterns, consumer shopping behaviors and other relevant information. ASIC (the Australian Securities and Investments Commission) pointed out that about one-sixth of Australian users have problems with overdrafts, overdue bills or "supporting loans with loans" after using BNPL services. Therefore, ASIC supports extending intervention rights to all credit institutions. Certain markets are also considering reducing BNPL’s financing leverage.
Tighter regulations are inevitable and will need to be addressed during the development of a BNPL product.
A point to note: The current BNPL business is mainly rooted in local markets and doesn’t involve cross-border use. However, with the continuous expansion of the market, BNPL will face cross-border data challenges in addition to regulatory dynamics in various countries.
Set up an effective engineering process
Considering the rapid change in the BNPL market, and the security and compliance requirements, what we need from the engineering team is agile practice, fast delivery, professional security knowledge and success metrics. Reasonable success metrics (CSAT, daily transaction amount, number of users, average order value etc.) will not only help BNPL companies know their customers better, but also help merchants measure the impact of using BNPL.
What does the future hold?
Given the evolution of the BNPL industry, here’s what we anticipate for this segment:
Emerging markets will continue to thrive during the policy dividend period
In emerging markets such as Africa, Central Asia and South America, where BNPL development is relatively slow due to the small size of the BNPL business market, there won’t be an intervention of regulatory policies or there will only be limited supervision. Young people account for a relatively high proportion of the population in those areas and are more likely to accept new technological products such as BNPL, although the boundaries between BNPL and credit cards may eventually blur. To meet the needs of these young people, local BNPL start-ups will continue to emerge. European, American and Asian BNPL giants will also gradually enter these markets. At the same time, based on the advantages of their existing credit system, banks will try to build products to match BNPL. Therefore, we expect BNPL to keep developing rapidly in these markets.
Mergers and acquisitions will increase
Giants such as Klarna, Afterpay, and Affirm will further expand in the global market through investment, mergers and acquisitions of local BNPL companies. The competitors in other traditional fields such as Amazon, Apple, PayPal, and China’s Tencent, Ali will further expand to BNPL. BNPL will be used as a standard feature in most mainstream self-contained scenario platforms, which already have a high volume of customers and transactions. The introduction of BNPL can expand new business areas while helping existing businesses grow.
Regulations will increase in mature markets
The BNPL business in Europe, America and Asia is relatively mature. As BNPL continues to expand in these markets, related problems have gradually emerged. This includes the continuous decline of the market size of traditional credit cards and the higher bad debts from BNPL users. These problems will lead to tight supervision while introducing regulatory policies to govern the BNPL market. It is expected that within one or two years, the regulatory policies in relevant markets will be further improved, and the unbridled development of BNPL business in these markets will gradually end, but enter a stage of steady development.
Conclusion
The future of BNPL is bright. It’s already transforming the payment industry by integrating more financial services and collaborating with other payment systems. Having the right technology practices is crucial for the growth and risk mitigation of BNPL. With the right tech in place, BNPL providers can better manage risk, prevent fraud and improve the agility and scalability of products. In today's digital age, having the right tech practices is necessary for any successful BNPL business.
Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.
