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Banking & Finance | Business

How to minimise regulatory risk for BNPL products

12 May 2022, by Amy Sarcevic

The Buy Now Pay Later industry has received a lot of scrutiny since its inception, with some consumer advocates questioning the ethics of financing at the point-of-sale. Amid high levels of consumer debt and low financial literacy, some believe the largely unregulated market – popular with younger demographics – may expose people to financial harm.

In the coming months, this scrutiny is expected to increase, as interest rate hikes place greater importance on the time value of money. To date, BNPL has largely operated in a low interest environment; and, as rates go up, a raft of its consumers could cross the line into financial hardship.

In response, BNPL providers may expect more regulatory intervention – and the associated business risk – warns Dr Rob Nicholls, Associate Professor of Regulation and Governance at the University of New South Wales. To counter this, he advises companies to co-design future BNPL business models in consultation with consumers or their advocates.

“Co-designing BNPL models with consumers is a great way to ensure your finished BNPL product will not cause undue harm,” said Dr Nicholls ahead of the Buy Now Pay Later Conference, hosted by Informa Connect.

“I’m sure many businesses will already be using focus groups for a similar purpose, but the kind of co-design I’m referring to is much more extensive. Ideally, you would want to involve consumers at every step of the design process, so that the finished product has their finger prints all over it.”

Such an approach would serve three important functions, he says.

Reduce regulatory risk

By co-designing with consumers, a finished BNPL business model would have some degree of pre-approval from the market. Should the industry ever become answerable to ASIC’s regulatory regime, this approach could ensure its survival, Nicholls argued.

“In the face of new retail protections, providers that have followed a co-design process wouldn’t have to change their product much – if at all – as it will have been designed in a consumer-friendly way from the outset,” he said.

“In contrast, models that have been designed with a purely commercial approach may face significant challenges if regulations come into effect.”

However, Dr Nicholls stresses that co-design is about more than superficially impressing the regulator. “By leading with the customer, ethics could be built into the model, minimising harm to consumers. If there is no harm happening, there would be no need for ASIC to intervene in the first place.”

Get a better product

A secondary benefit of consumer co-design is a more robust product. “When you include customers in your design process, you will generally end up with a much better outcome – i.e. a more appealing and profitable business model – than you would from having simply undertaken market research,” Dr Nicholls said.

“Of course, market research still has its place, but my suggestion would be to use it alongside your co-design process; not in place of it.”

Indeed, customer / user co-design has already seen success in similar industries. In the Energy sector, PowerLink in Queensland co-designed their regulatory proposals for transmission networks. Meanwhile, the Australian Clean Energy Regulator has produced a manual of co-design methods.

“The energy sector has worked really well with consumer advocates in highly technical spaces – still making valuable contributions to electricity tariffs,” Nicholls said. “Like Financial Services, Energy is a high touch and high cost industry, so these cross-sector comparisons are worth noting.”

Get a head-start on marketing

By demonstrating positive intentions to consumer groups from the outset, BNPL providers will have already laid the foundations for a favourable public image. While this should not be a driving force, it is an outcome worth celebrating, Nicholls highlighted.

“In effect, going out into the field and showing consumer groups you care about the wellbeing of customers will give you a head start on your marketing and PR efforts.

“Advocates will tell their organisations that ‘Company X’ has designed a BNPL product that is not harmful to consumers. It may only be a small imprimatur, but importantly, it could also deter advocates them from airing any negative reviews in public media – something that they are well-known for.”

Not without risks

Despite its ability to reduce regulatory risk, Nicholls warns that this approach comes with risks of its own.

“There is of course a danger that some of the ideas from consumer groups will not be workable, and you may have to ignore a few to make your model commercially viable. If you are actively going against suggestions, then you may end up achieving the very opposite of what you set out to,” he said.

“That said, I believe there are plenty of solutions that work for everyone. So with a bit of courage, it’s still worth giving it a try.”

Will any ideas float?

“In short, the more transparent the better,” Dr Nicholls said.

“Say you are running a model where the merchant is paying six percent of the value of goods and services being sold, for the privilege of letting their customers pay off in four instalments. My suggestion would be to let the customer know this; as the merchant would have no doubt factored that six percent fee it into their retail price.

“With this knowledge, if someone is buying a television, and wants to pay for the full amount upfront, they could ask the merchant for a six percent discount.

“That level of transparency helps both consumers and traders. Understanding where people are making a dollar out of the transaction is valuable for all parties.”

How do you go about co-design?

Presenting at the Buy Now Pay Later Conference, hosted by Informa Connect, Dr. Rob Nicholls will share his expert perspective on how a successful co-design process might look. This years’ event will be held June 6 at the Swissotel Sydney.

Register now to secure your seat.


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