A seismic change is coming to the legacy BNPL industry. Businesses in the space will need to shift their current models or risk disappearing altogether as increasing write-offs lead to greater losses and tighter regulations. This presents a new opportunity for merchants—the most disenfranchised players in an existing ecosystem that also includes bank issuers, payment processors and card networks.
Legacy BNPL models are challenged in several major ways:
1) Write-offs are becoming unsustainable: Legacy BNPL providers offer low-AOV, pay-in-4 installment plans to consumers with subprime credit scores who need instant credit to buy things they essentially can’t afford to pay for at purchase. The strategy has led to write-offs that often peak at 4%–5% of total merchant volume.
2) Inflation is creating a vicious cycle: With inflation at a 40-year high, demand for BNPL offerings from consumers with little or no existing credit will increase, but their ability to pay back these loans will significantly decrease. This higher demand will drive more fees and write-offs, worsening many consumers’ financial problems—even as they face higher prices.
3) Merchants resent being cut out of the picture: Brands want to own their customer relationships, but legacy BNPL providers create a direct relationship between themselves and a merchant’s customers. These providers capture valuable first-party data and then use it to target consumers with offers that accelerate their own business growth. Merchants lose out as the BNPL providers deploy these clandestine tactics to own the customer.
4) Regulators are putting BNPL models under a magnifying glass: Higher write-offs will lead to new regulations to safeguard consumers against predatory lending and unreasonable fees and interest payments. The reforms will constrain legacy BNPL businesses, forcing them to monetize registered shoppers through additional offers—putting even more distance between merchants and their customers.
5) Apple’s entry into BNPL will fuel competition over a shrinking customer base: Legacy BNPL models target only about 20% of consumers—those who have lower credit scores and who don’t tend to purchase many higher-ticket items. These businesses ignore the opportunity presented by the roughly 70% of consumers with FICO scores of 600 or higher, who are less at risk of missing payments and hold more purchasing power and potential LTV.
Legacy BNPL providers are targeting millions of consumers who are looking to finance products that they can’t afford to pay for in full at the time of purchase and neither the legacy BNPL providers themselves nor the economy will be able to sustain the resulting losses. These providers will need to either pivot their business models or face a wave of consolidation. For merchants, now is the time to demand a better installment solution, one that empowers them rather than putting up barriers between them and their customers.
Nandan Sheth
Chief Executive Officer, Splitit