How to Firewall Risk in a Buy Now, Pay Later Product

 In our recent report, we made the case that banks and credit unions consider Buy Now, Pay Later (BNPL) as part of a holistic suite of payments products.

While a study from IntraFi Network found that four out of five small banks and credit unions are reluctant to get into BNPL, SRM believes that traditional FIs have the infrastructure to handle compliance requirements from agencies such as the Consumer Financial Protection Bureau.

But what about the credit risk?

We assert that the vast majority of FIs can manage the underlying risk in a BNPL portfolio. Key considerations include anticipating customer needs and identifying the right customer with the right credit risk. Banks and credit union also need to forecast potential loss rates and set aside adequate reserves to cover instances where consumers are unable to make their installment payments.

There are other steps that banks and credit unions can take to mitigate risk further, taking into account practices by other companies that have already entered the market.

Perspective matters. Any financial institution considering BNPL must determine if its reason for offering the product is to provide customers/members with another payments option or to help clients in the retail industry complete more transactions at the point-of-sale. This will determine the types of retail partners, the customization, and the policies used to succeed.

Support of Commercial Clients. For the right commercial client, BNPL can help the merchant acquire more customers. Merchants such as BJ’s, Microsoft, and Sole are also looking for more risk mitigation tools. Some issuers are offering comprehensive programs to support big-ticket items for their merchant customers, while avoiding more-risky solutions used to buy everyday items like gas and groceries.

Vet your BNPL applicants. Soft credit checks could keep a financial institution’s credit exposure in check. Case in point: Apple plans to do so as part of its newly launched Apple Pay Later service.

Exercise restraint. Apple’s BNPL model also includes several other practices designed to show discipline and firewall its overall exposure. The tech giant will not extend additional credit to users who miss payments and will reportedly enforce a $1,000 lending cap.

The Bottom Line

The best defense against potential credit cracks is a comprehensive set of policies and procedures designed to thoroughly vet BNPL applicants and limit individual exposure across a highly granulated portfolio. It then comes down to execution and setting aside an appropriate amount of funds to handle any issues.

Banks and credit unions must also keep the customer experience in mind when setting up credit firewalls, balancing protections with a product that allows choice and accommodates the seamless purchase of goods and services at the point-of-sale.

BNPL should be considered part of a credit life cycle where it provides a financial institution with an eventual opportunity to promote more-traditional products such as credit cards, mortgages, and home equity lines to consumers who establish a reliable track record of paying off their balances.

SRM can help you review your strategy and determine if BNPL fits into your long-term plan. We can evaluate the outside partners necessary to get you where you want to be in this evolving space.