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It’s a massive topic in the financial industry right now, and we’ve already talked a bit about the ‘standard’ Buy Now Pay Later (BNPL) model, where consumers can access instant lending at point of sale to spread the cost of their purchases. This version pretty much does what it says on the tin, and is being adopted at an astounding rate, but there are still a lot of questions around how to make it safe and ethical for the customer and the industry.
Because it’s such a real-time offering, there’s a potential risk problem, due in large part to the existing infrastructure for credit checking and KYC processes. Usually when you have a lot of purchases with a lot of vendors, it’s via a credit card, so all the risk is centred on that card and the card issuer can easily keep track of usage and repayments. Similarly, with a standard personal loan, the risk is understood early on and a set amount is agreed that the lender believes you can pay back. Any subsequent loans or requests for funds would then be assessed separately, and could be affected by how reliably the previous one was repaid.
For consumer BNPL, which generally involves much smaller loans, it can be difficult for lenders to get an accurate view of the risk they’re taking on each customer because the borrowing won’t necessarily show up on Open Banking until repayments begin. Not only that, but it might not appear on your credit report for a couple of months, leading to a potential double risk situation. Without this kind of information, and with the standard BNPL offering postponing payments for set periods of up to 24 months, it can be incredibly hard for lenders to see that you might have made several different purchases that will all have repayments due at similar times, and that, when combined, you might struggle to afford.
There is of course the chance that regulation goes the way of a ‘smart pass’ type approach similar to crypto offerings. This might involve a physical token that holds data on your current credit position, what you’ve borrowed and when; and speaks to any platform about your debt breakdowns. While this would allow lenders to safely decide whether to lend to you; we’re not there yet, so where can we look for a less risky option that still drives the industry forward?
What we haven’t yet talked much about is the fact that the issues that make consumer BNPL inherently risky right now, are the same reasons that BNPL for Business is a much safer proposition.
Businesses are generally paying large invoices, in lump sums, on an ad hoc basis, and for smaller companies in particular this can be a real challenge to their cashflow. A BNPL for Business solution could allow them to even out these costs over a longer period to ease the strain on their books and prevent situations that we see all too often, whereby small companies struggle to manage their own debt while they wait for larger, slower companies to pay them.
For start ups in particular, this could remove a huge barrier to entry. No longer would they have to dip into their precious funding to spend, say, £50k upfront on office furniture, but instead they could pay that back over a year or two and vastly improve their working capital position. Not only is it much easier to risk-assess these larger lump sums, it’s also much more likely (generally speaking) that a business has the tools, people, and financial literacy, to accurately monitor and understand their position. It’s much harder to know if the individual consumer has the time, inclination, and understanding to do the same, so the risk of default with a business is inherently lower than that same risk with an individual.
The current lending landscape for small businesses is also far from ideal, it can be incredibly clunky to navigate and very slow to get the funds you need in a timely manner, which is another reason BNPL for Business could be the answer to many a finance officer’s prayers.
The flexibility and security of our core banking infrastructure means we already have everything we need to help. We could stand up a BNPL for Business proposition in next to no time, quickly and easily enabling a new lender, or one with a novel offering, to target specific options at exactly their desired business sector. Not only could this genuinely transform the business lending industry, but it could enable a great many new and exciting companies to get off the ground, with their cash flow covered.