Few fintech sectors have seen more change and more growth
than retail finance. The market has more than doubled over the past five years,
now sitting at an estimated value of US$2.5tr. It’s growing at an annual rate
of 20% - and it’s not showing any signs of slowing down.
However, what lies ahead in 2022 might steer retail finance,
primarily Buy Now Pay Later (BNPL), in a different direction. The size of this
market has become impossible for regulators across the globe to ignore, and the
repercussions will shape the sector for years to come.
Make no mistake, this market is not shrinking anytime soon.
Still, in 2022, regulation will make this market safer for consumers, changing
the way retailers and lenders collaborate to deliver new and innovative
solutions at the point of sale.
Regulation
The Financial Conduct Authority (FCA) in the UK released the
Woolard Review in early 2021 outlining its plans for regulating the market.
Since then, authorities and regulators across the globe have taken similar
steps.
While it’s unclear exactly what this regulation will entail,
it will be sure to have a significant impact on the way BNPL providers
currently operate, and they will have to adapt quickly.
The aftermath could affect traditional lenders, such as
banks, positively and the early, unregulated trailblazers less so. Let me
explain why.
Traditional lenders
Slow-moving lending giants don’t work quick enough to catch
on to the latest fintech trend. Creating a BNPL solution is an almost
insurmountable task for a bank with lots of moving parts and tangled wires
developed over decades; it would just be too expensive and too time-consuming
for them to even consider it. By the time their product is developed, the
fintech world has evolved, and they’re well behind the curve, having wasted an
awful lot of time and money to get there.
However, one thing banks are always one step ahead on is
regulation. Decades of experience in adapting quickly in response to new
regulation has meant that banks have maintained their credibility and
trustworthiness, two vital ingredients for the BNPL world in 2022.
But even without that, this year presents an exciting
opportunity for bigger, traditional lenders. While the fintech disruptors (less
familiar with walking the regulatory tightrope) get their heads around the
changes, banks will be able to close the gap and look to take charge of this
trillion-dollar market.
Retailers
Retailers have a slightly different future ahead of them due
to impending regulation. Most online retailers now offer some form of BNPL
option at checkout, and many offer more than one, partnering with multiple fintechs
like Klarna and Clearpay for example.
How BNPL providers deal with new regulation is what’s being
dubbed ‘Klarnage.’ This gives some inclination of how the disruptors are
expected to handle things (i.e., poorly) which causes problems for retailers.
If BNPL providers act like they’re expected to in the face
of regulation, retailers partnered with certain providers could face backlash
from the media too. They’re likely to get caught up in the media storm, which
will affect their brand image.
This issue is exacerbated by the fact that retailers
regularly hand over their entire customer journey to BNPL providers at the
point of sale, directing customers through to external websites or to set up
separate bank accounts.
All in all, unless retailers choose to offer their own BNPL
solution – again facing the costs involved in doing so - they will likely get
caught up in the ‘Klarnage’ fallout.
Innovation
While it’s looking slightly rosier for retailers, they face
the same problem as banks, namely, the need to develop their own BNPL solution
that they can control. One option is to build their own solution, but, as I’ve
highlighted, that seems impossible given the costs and timescales involved.
With a booming market, there are naturally many different
solutions on offer, as more and more players seek to enter the market. While
this can cause a headache for potential buyers on both the retailer and banking
side, it does breed disruption and innovation. One solution that solves this
issue that both lenders and retailers face is a whitelabel retail finance
platform that connects the two together.
By integrating a trusted BNPL solution quickly and
seamlessly into their existing systems and processes (connecting directly with
retailers), established banks can enter the space at this pivotal moment,
potentially getting ahead of the fintech disruptors. Retailers, meanwhile, can
avoid the fallout of BNPL providers failing to address regulation effectively.
2022 is a very exciting time for all involved (except perhaps
the fintech disruptors). With innovation and regulation merging at this central
moment, lenders and retailers can engage in this space like never before and
transform the way BNPL works for the better.
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