Buy Now Pay Later (BNPL) was a hot topic of a couple of conversations last week.

Over the last couple of years, it has been an area of significant growth, and one that recently has had a lot of media coverage. This is especially true regarding concern for consumers who may borrow too much and get into problem debt… but are the dynamics all they really appear? A few observations from the week.

1. The market segment is, at the moment, smaller than may appear – with around 8 or so main BNPL players in the UK, total receivables are far behind the credit card sector.
2. The original business model is driven off, closed loop relationship with merchants – higher fees for more sales. Most of these stores appear to be high-end or brand direct-to-consumer retailers… think BOSE or Nike, rather than Curry’s and Sports Direct… how many of us have main retail relationships outside big-box retailers… for something special, maybe, for everyday spend probably not… this has largely limited market size, up to now.
3. Most purchases have been low balance, low ticket items, spread over a few payments over a period of weeks… total outstanding liability has been low and payment history can be built up quickly before lending more.

However, all is not necessarily well in the BNPL world and despite early profitability many are now losing money. Administration expenses and bad debt losses exceed merchant fee revenue in many cases, and with no interest charged, the resulting cash flow does not look great in the short term.

You get the sense that the current strategy, with investment, is to outgrow losses – Ie “okay lose money now, but for returns at a later date”.

With some players already exiting the market, you wonder how robust a strategy this really is, and with this push for growth comes the real risk for many.

Risks with Growth

To expand the market there are a couple of big levers that can be pulled.

1. Extend time between payments, making it more attractive for consumers. However, the longer the time to pay the greater the inherent risk of non payment. Afterall, the greater the time between installments, the higher the likelihood a consumer’s situation changes and they cannot pay. Currently Zilch is at 6 weeks (similar to a credit card), Klarna at 3 months.
2. Expand to more retailers, especially big-box retailers. The more mass-market retailers, the more transactions, spend volume and hence merchant fees. However, the risk profile of customers who spread the cost of buying specialist products can be quite a different profile from those doing this for food (not in all cases, but for some). The more mainstream spend captured, the more risk that will be encountered.
3. Increase transaction value. Current values are typically low, below or in the hundred, not in the thousands. Moving to higher values means more fees, however it also concentrates risk and loss if the customer cannot pay.
4. Loyalty programmes. As we have seen in credit cards, these can capture more spending, especially diverting from competitors. However, these also cost money to provide, and were heavily squeezed due to pressure from merchants to lower fees (especially from big-box retailers)

In the search for growth, each of these trends seem to be being explored across the industry.

Whilst there is undoubtedly a profitable niche in the market at a smaller scale, scaling this up to a wider mass market, especially without the infrastructure, the question needs to be asked if the business model is really sustainable.

Will it in fact all go crunch… collapsing and impacting some customers as collateral damage along the way?

Managing with fine margins

From my time at Amex, many years ago, I remember just hard this management can be. Relying on merchant fees as a primary source of income results in very fine margins, requiring many sophisticated risk management and collections hoops to make it profitable.

It seems these techniques are currently missing in BNPL at the moment… (and we have not got to the pressure from lowering merchant fees fully yet either)

So where next?

Despite these challenges in the market, more mainstream banking players, are also now moving in, no doubt in search of their own growth in lending.

I do wonder if this evolution is actually the path we will see to mainstream profitability for the mass market business model.

For example, I have just been given the option to spread the cost of my fuel purchase by my banking provider. It was 3 installments for free (apart from the personal data I had to provide). As a consumer (and given the cost of fuel) it is a great deal and you think why not!

What is more, if I need to spread over more payments I can… at 19% APR… it really is an intro to mainstream consumer lending… some financial services players know how to do.

We have seen this approach before in the credit card market, which already has up to 6 weeks interest-free and often 0% balance transfers to spread payments too… I do wonder if this is where we will end up here too… is it the same in a different wrapper

Is this is future? And is this sustainable? It could be. Watch this space.

… and if you are running a BNPL collections process, getting ready today with modern collections techniques and processes can really help your business to manage within its profit margins… all of this will help for this future.

Have a good week everyone.

With the weather now greatly improved, I was reminded this week of the seemingly long summers of my youth, during the last weeks of term.

I remember looking longingly out of the window at the time, a blue sky and vibrant green grass, whilst all the while I was inside sweating over quadratic equations, complex numbers, or something similar.

However, this got me thinking about teaching and how we value it.

At the time some of the skills we learn don’t seem to ever likely be useful, let alone practical… then later in life, we find they actually are. (yes even algebra and complex numbers)!

These days of the internet we can learn so much in a self-directed manner, often for free and it really is amazing.

However, I was struck on how there is still really enormous value in teaching and in having good teachers.

The value in a teacher isn’t just telling you the facts, but (and even more so these days) the fact that they know more than you.

They can see beyond what you know, to things you don’t yet understand, and the reason why things are important. A guiding hand on what to learn, why, and how to learn it. They can create belief in yourself and an ability to stretch yourself further to be better than you thought possible.

The same is true for your peer group, friends, and colleagues at work too.

Knowing more, setting higher expectations can actually create more belief. Leveraging each other we can do more and help each other to achieve more and be better and smarter in what we do… it really can be additive, rather than competitive… something than can get easily lost, but we need to remember these days… just look at what happened in the last week

Dear CEO letter

The FCA released its ‘Dear CEO’ letter, basically laying down the law for financial services firms, in they are going to be expected to “pick up the slack” and look after their customers in financial difficulty through this cost of living crisis.

Certainly, lots of financial services firms have been doing this already. However, I also read this as a coded “shot across the bow” for those that may think twice, to say “the good times are over and you are expected to step up”.

This together with “you are have all read the new consumer duty (due April 2023) and have had plenty of time to implement changes… it is going to arrive and you better be ready, we will enforce it”…

… time to double-check we are ready for sure.

Fuel price cap increases

Last night, I sat bolt upright in my chair last night seeing Martin Lewis’s tweet informing me of the latest status of the energy price cap in the UK.

Bearing in mind my fuel bill already seems to have gone up by 30-40% in the last year… we are apparently due a further 50% increase in October.

Just got latest @CornwallInsight price cap predictions. Wholesale prices spiked heavily last week, so they’re up a lot Today’s price cap: At typical use = £1,971/yr Prediction Oct – Dec: UP 51% (£2,980/yr typical use) Prediction Jan – Mar: UP 1% (£3,000/yr typical use)

https://twitter.com/MartinSLewis/status/1538921682601222146

Now, £3,000 a year on an average income of £31,000 is getting close to 10% of income on fuel. With increasing food costs (£4,500) and interest rates there is not going to be much left over for many folks.

Likely impacts over the summer and increasing into the autumn, we are now looking at… yikes

• Less disposable income – undoubtedly
• Economic slow down or recession in UK – highly likely
• Reduced levels of borrowing – likely
• Slow down or collapse in the housing market – probably (slow down already started in some areas)
• Increasing arrears levels in collections for financial services – I think so

It is really starting to feel like the back end of the year is going to be even more chaotic… again worth getting ready now while we still can.

A new consumer credit act and BNPL changes

Finally, new affordability checks for Buy-Now-Pay-Later transactions, together with bringing these firms under the regulation of the FCA were finally been reported this week.

Obviously, most of us think this is a good thing… it has been long discussed and expected for a while.

Under plans set out by the government today it confirmed that lenders will be required to carry out affordability checks, ensuring loans are affordable for consumers, and will amend financial promotion rules to ensure Buy-Now Pay-Later advertisements are fair, clear, and not misleading. Lenders offering the product will need to be approved by the Financial Conduct Authority (FCA), and borrowers will also be able to take a complaint to the Financial Ombudsman Service (FOS).

https://www.gov.uk/government/news/regulation-of-buy-now-pay-later-set-to-protect-millions-of-people

However, what was also reported was the reform of the consumer credit act.

This piece of legislation governs the vast majority of consumer lending in the UK… any change could be a big deal and something to watch very closely. It is due to finish consultation at the end of the year.

… unfortunately, with everything going on it seems we may not be able to stare out the window as much this year either too.

Have a good rest of the week everyone…

Last weekend was of course the Platinum Jubilee in the UK. For those of you not here, there were lots of festivities, sausage rolls, and cake, but amongst this wave of activity, there was also something else rather nice going on. People meeting people.

Sometimes it feels like we live in a very transactional world, even more so with remote working, rushing about trying to meet one deadline or another.

This last weekend, being 4 days, this seemed to somewhat stop again. It was nice to spend some time on a local level, chatting, having a laugh and spending time with friends and neighbours.

As we embark on this weekend, it is something to remember maybe?

And, with all that is going on the news, other items seem to be getting lost. The cost of living crisis and proposed energy rebate was announced did not really seem to be talked about much, as of yet at least.

To remind you, most of us, who are electricity customers (>6months), are going to get a £400 credit applied directly to our accounts in October.

You may think this is a nice little windfall, although it of course will only offset what will likely be another steep hike in the energy price cap in October (for which my energy supplier seems to have already taken preemptive action – doubling direct debit payments, despite it being summer, not needing the lights on, let alone the tumble dryer (what is wrong with the washing line)).

But, more specifically, how will credit work for customers already in arrears, many of whom may also be in financial difficulty?

Now there is an additional £650 payment to support the most vulnerable, with extra winter fuel allowances also being considered, but you may already have a balance outstanding or be on a payment plan – what will happen?

If the credit is merely applied to the account, the balance will simply be applied to the oldest outstanding balance first. The balance will be paid off faster, practically resulting in customers being just less in arrears (with a probably boost for reduced write-offs at a business level too).

Now, this is not to say this is not positive. The money still needs to be paid back at some point and it is financial support.

However, in terms of short-term help for a short-term cost of living crisis, it will hardly touch the sides in terms of immediate help. To do so will require the recast and adjustment of reduced payment plans.

Is this something that will need to put in place to help and will it be? Maybe it is already under discussion, to pass this along to the customer, however expect more to come on this as we start to near the back end of year.

Have a good weekend everyone.