Despite the strong headline numbers, not everything is rosy in the BNPL world. For example, nearly 40% of Americans surveyed by Motley Fool Money say they’ve regretted using BNPL after realising their total cost burden and 58% say they’ve used BNPL to finance a purchase they otherwise couldn’t afford. In 2024, 24% of Americans who have used BNPL have made a late payment, according to the Federal Reserve.

TTP and Koenigsberg Insights brought together payments and banking experts for a breakfast roundtable at Sibos in Frankfurt to kick-start an industry discussion around potential opportunities and risks in BNPL, as well as how the industry could work together to realise its potential for small and medium-sized enterprises (SMEs), which have difficulty accessing traditional bank funding.

Powering the SME economy

In light of the consumer research, the roundtable debated whether an irrational enthusiasm had developed around this new payment type. However, there was a general consensus that BNPL could potentially empower SMEs by providing the ability to control their own credit, better manage working capital, increase sales, and improve cash flow.

Plus, an SME may find it easier and faster to access BNPL than other working capital tools.

“If SMEs aren’t able to access liquidity from their banks, they may be struggling and BNPL could help them,” argued a participant.

Another pointed out that the focus shifts from the borrower in traditional credit to the seller in BNPL. “A merchant might adopt BNPL to increase sales and add a margin on the product, or a built-in cushion, in case they need to absorb a loss,” they said. “This gives a little more power to the seller to decide whether it would be willing to extend credit and take on risk to increase its sales.”
others queried whether a small merchant selling goods or using BNPL to float their business, fully understands the cost of acceptance, what they’re borrowing against and the associated fees. There is also the added complexity some SMEs and mid-market merchants face when doing business across multiple markets and/or regions with diverging BNPL regulations.

It’s likely that merchants are also caught up in the exuberance. “They may believe that they have to offer BNPL because their competitors are. Perhaps, they’re not thinking about the impact as much as the lost sales from their customers going to another merchant who offers BNPL,” said a contributor.

Systemic risk

Beyond the individual company risk, roundtable participants debated whether BNPL was creating a phantom debt bubble without an industry-level understanding of where the issues or points of stress are. Such systemic vulnerabilities could fundamentally reshape the payments landscape. “Is the industry prepared to wait until something [bad] happens?” asked one participant.

Information asymmetry between lender and borrower has been a perennial challenge in lending. While a borrower is intent on making themselves look as good as possible, a lender wants to separate good borrowers from bad in terms of repayment probability.

This problem has been exacerbated by the advent of BNPL, as banks and other lenders don’t have a full picture of the true obligations on the consumer or SME side. Customers can access multiple BNPL providers that don’t have visibility into which other lenders have also provided credit. For example, until Swedish BNPL firm Klarna went public in September, there was no transparency around its loan book in terms of losses.

“These are complex systems with many unknowns as the platforms expand. It could turn ugly should circumstances change,” added another.

Part of the issue is that non-bank financial institutions (NBFIs), such as Klarna, are underwriting credit risk like financial institutions, yet several contributors disputed whether they truly understand underwriting.

“These BNPL platforms are omnipresent and scale quickly. But if NBFIs don’t understand [the underwriting model], then we’re heading for trouble if one of them tips over. It’s not just one credit bubble – perhaps it’s a thousand tiny bubbles,” said a participant.

“I expect several BNPL platforms to go under once the credit bubble has burst, as their model is for good times, not bad,” said another. “However, my main concern is whether the merchants are sufficiently protected in such an eventuality and how much a collapse will affect them.”

Industry action

The zero-hour for a credit time bomb explosion might not be far away. One participant pointed to the statistics on Gen Z and millennials using BNPL for grocery purchases as a leading indicator for a recession. The percentage increase in using this new payment method for everyday items is an indication that economic conditions are starting to worsen.

How can the industry ensure that BNPL is a positive force, driving democratisation in credit and empowering SMEs and consumers in a safe and sound way? The roundtable contributors outlined several suggestions.

First, gain visibility over the transactions across multiple platforms to address the information asymmetry. “As this scales up, the global industry needs to put in place processes to record information and have a repository where it is both available and accessible,” said a participant. “To have a credit scoring methodology, there needs to be a repository, and the industry should be working towards establishing it.”, participants suggested that BNPL providers should deploy AI tools to improve risk assessment accuracy in credit decisioning through real-time analytics and alternative data. For example, such tools can detect when purchase amounts go down, such as consumers using BNPL to buy toothpaste, which is an indication that there may be a crisis brewing, according to one participant. “A smart company could then decline the next transaction. It does happen, but it’s episodic and inconsistent,” they said.

Third, fintechs and banks should work together to provide BNPL access to SMEs and allow them to build up their credit rating, which will, in turn, allow banks to offer other working capital tools.

“If SMEs could use BNPL as a way to establish their credit rating, it might be a way to achieve better fiscal discipline and use it in a conversation with their bank about accessing something more structured, better secured, etc,” argued a contributor.

Fourth, central banks, regulators and the industry should focus on financial education for both lenders and borrowers.

Overall, there was a general consensus that the regulatory pressure should be put on the BNPL providers, not the merchants. “The landscape is too fragmented for merchants to perform the required evaluation that’s needed for them to fully understand what they’re getting into,” explained a contributor. “As such, there needs to be a standardised offering, or at least a well-understood regulated industry, so it eases the burden on the merchant.”

From a regulatory standpoint, many felt that it was important to retain the benefits of BNPL while helping to mitigate the downside risk through requiring credit reporting transparency and common minimum standards, such as a ceiling on interest rates and fees.

“This will provide room for the industry to make its own decisions, while protecting potentially unwitting consumers and companies from the most egregious practices,” said a participant.