Regulatory pressure could spur more innovation at buy now/pay later firms

The hot point of sale credit market is drawing regulators' attention, but that may be what the installment payment market needs to avoid a credit crunch.

"We're starting to see regulators creep into buy now/pay later," said Bradley Riss, chief commercial officer at Checkout.com, during Card Forum: Contactless, hosted by PaymentsSource this week. "Most jurisdictions seem to be leaning toward it as being a lending product."

Checkout.com has worked with Klarna as a payment processor. Klarna is one of the prominent players of the BNPL market, along with companies like Afterpay and Affirm. BNPL has grown exponentially over the past year, providing a way for consumers to finance larger purchases while avoiding building credit card debt. Merchants also like the product because it can increase cart size even when the financial crisis limits consumers' cash flow.

That growth has lured investors, with Affirm's stock jumping nearly 100% following its IPO in January. Klarna has drawn investment from the likes of Ant as the Swedish BNPL firm expands globally.

With that success has come pressure as delinquencies tied to the product increase and regulators in Australia, the U.K. and elsewhere are expected to tighten rules for BNPL, most likely by regulating it similar to bank lending.

Most jurisdictions currently do not have specific BNPL regulations given the relative newness of the business model. If installment payments at the point of sale fall under heavier regulation, it's an opportunity for the industry more than a setback, according to Riss.

"Regulation isn't always a bad thing; it allows you to fine-tune your offering," Riss said, adding BNPL firms could expand their services as the category becomes more regulated. "It's part of the maturation process."

Several BNPL firms are already diversifying beyond point-of-sale credit. Klarna is using its Amazon Web Services-powered core banking system and Swedish banking license to build financial services on top of installment lending to take advantage of its enrolled user base. And rival Affirm has added a savings account.

The popularity of the BNPL concept could draw more companies to the space, Riss said. And there is also room for point of sale lending to expand, since BNPL still is a relatively small part of the overall e-commerce market.

"Once there's a good idea like BNPL, you can imagine the largest merchants doing this," Riss said. "Credit cards started as a form of store credit so this takes it full circle. If a merchant is offering in-store credit, why not have in-store installments? The question is the benefits of doing it in-house versus having it managed."

Checkout.com works with a variety of firms such as Grab, Revolut, Robinhood and Remitly. This has given the company and Riss a view of how businesses have added digital payments and responded to the pandemic. Checkout.com is also part of Diem, the Facebook-affiliated stablecoin project formerly known as Libra. For each of these partnerships or client relationships, the challenge is to evolve into more of a technology partner than a provider of digital transaction support.

"Payments is a privileged position to be in," Riss said, adding Checkout.com's role can range from helping other firms solve the "last mile" of shopping, payment and fulfillment, or the "first mile," such as the user experience. "We're viewed as a partner and must have an understanding of the mission of that business and the way in which they want to accept payments."

Much of the innovation over the past year began before the pandemic hit. As bad as the crisis has been, it was fortunate that new payment technologies were available.

"It sounds trite, but we're lucky the pandemic didn't come 10 years earlier," Riss said. "We have contactless and other technology that allows for safer transactions."

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