The topic of consumer protection in buy now, pay later (BNPL) has been heating up as regulators around the globe are turning their attention to the industry. The U.S. Consumer Financial Protection Bureau's (CFPB) recently announced plan to regulate legacy BNPL lenders like they do credit card companies is good news for consumers. But hidden in that news is how BNPL regulation can be a big win for merchants. Even though retailers may feel daunted by added regulations, there's tremendous upside for merchants to create a stronger, more personal relationship with consumers.
Why the Need for Regulations?
Installment options have been around for many years in various forms. Still, BNPL options surged in popularity during the pandemic, especially for younger consumers with little or no credit history. However, the actual costs of legacy BNPL options are coming to light. Many consumers have gotten in over their heads and are defaulting on their BNPL payments, resulting in much higher interest rates and fees than the low payments they initially signed up for.
It’s not just the CFPB in the U.S. scrutinizing the BNPL industry. Regulators across the globe have signaled that they’re moving towards greater oversight. The European Commission, the U.K.’s Financial Conduct Authority (FCA), and Australia’s financial services minister have indicated moving forward with some regulatory oversight. Regulations will allow consumers to prioritize their financial health with better, more transparent guardrails to protect them from snowballing fees and even greater debt.
The Consumer Becomes the Product
Legacy BNPL lenders have done an excellent job of enticing shoppers with super apps that become a launchpad for product discovery, discounts and purchases — all thanks to the data they’re gleaning from their merchant customers.
Merchants spend significant time, money and resources to bring consumers to their sites and turn to BNPL to drive new sales and increase customer loyalty. Shoppers get to pay over time, and the merchant gets the conversion. But the BNPL lender now has valuable data on the shoppers.
The overall return on investment rarely favors the merchant. The BNPL lender uses this data to accelerate their business growth at the merchant’s expense. Instead of the merchant reaping the loyalty reward from their hard-earned marketing dollars, the BNPL lender monetizes the newly acquired customer. In essence, the customer becomes the BNPL’s product.
Decrease in Loyalty and Customer Lifetime Value
The appeal of discounts and discovery is a winning combination that has propelled many other consumer trends. BNPL is no different, bombarding shoppers with thousands of new offers. Although this sounds like a winning hand for merchants, it decreases customer loyalty and overall customer lifetime value (CLV).
Why? Now more than ever, first-party data is increasingly more valuable. Rising customer acquisition costs (CAC) are straining e-commerce profitability, putting more pressure on driving repeat sales, where existing customers spend 67 percent more on average than those new to your business.
Shifting the business mindset from a transactional model of bringing in new customers to one that favors long-term value is critical in today’s economic environment. A one-sided approach will yield a low CLV to CAC ratio, where you lose money on each transaction.
Protecting Your Investment Long Term
What can you do to protect your investment? It starts by protecting your customers’ data and the integrity of the relationship. Keeping end-to-end control of your customer journey preserves your customer acquisition investment while increasing loyalty and CLV.
Are we saying ditch BNPL altogether? No, because not all BNPL providers are created equal. There are plenty of beneficial options for you to choose from that can help your business grow. However, there are some best practices to consider when selecting a BNPL partner:
- Protect your brand. Look for a service that promotes your brand, not the brand of a third party. Ideally, a solution that embeds into your existing customer journey without creating an out-of-brand experience.
- Protect your customer. Ensure that the BNPL lender isn't hijacking the direct relationship between you and your customer. Ask questions about what data it's gaining from each transaction. Protect your business from a partner that makes money from reselling your customers’ data.
- Target growth consumers. Look for a partner that drives long-term loyalty and repeat purchases, not just a quick sale. In an environment with escalating inflation where originating new loans will become harder, you need a partner that can target consumers with existing available credit and a propensity to spend more.
Don’t Fear the Scrutiny
There’s no reason to be alarmed by regulations. The global retail industry should applaud greater oversight of BNPL lenders as a big win for consumers and merchants. BNPL lending regulations help create a more level playing field to ensure that consumers have a system in place to protect their financial well-being while protecting the relationship between the retailer and consumer.
Nandan Sheth is the CEO of Splitit, a company that powers the next generation of buy now, pay later (BNPL) through its merchant-branded Installments-as-a-Service platform.
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Nandan Sheth was appointed as CEO of Splitit in January 2022. A seasoned payments industry executive, Sheth brings domain expertise through his work at large payment companies, major banks, Fortune 100 companies and disruptive technology startups across North America and Europe. His record of entrepreneurial success includes scaling and successfully exiting multiple fintech companies, including Harbor Payments (sold to American Express in 2006) and Acculynk (sold to First Data in 2017).
Sheth’s executive experience in the payments and fintech sector spans strategy, scaling innovation, corporate and business development, product development, technology, and operations. Prior to joining Splitit, he served as Fiserv’s Head of Global Digital Commerce as well as Head of Fiserv’s Carat business, an ecosystem of omnichannel commerce solutions for large multinational merchants. Prior to that, Sheth was President of Acculynk, the business he co-founded in 2008 and sold to First Data in 2017. His earlier experience includes serving as GM at American Express and helping to scale Harbor Payments (sold to American Express) and e-Debt. Sheth holds an MBA from the Cass Business School and a BSc with Honours from City, University of London.