47 Finance Monthly. Bank i ng & F i nanc i a l Se r v i ce s likely end up – not too dissimilar from other forms of lending. Many providers are revising terms, providing new options for payment at the point of sale and creating more prominent messaging and options. Their internal practices are also sharpening up. Providers are strengthening their credit risk controls – adopting good practices in line with more traditional lending products (and providers) in assessing customer indebtedness and ability to afford repayments, as well as better overall management of their credit risks. However, it is important to note the requirements are not certain. The questions, as the Treasury put it, are – what is to be included within the scope (that is, what is no longer to be exempt) and what controls need to be in place to manage this. Their conundrum, remembering that BNPL looks and feels a lot like other types of arrangements, is: cast the statutory net too wide and they risk including arrangements that do not require such attention and may have unintentional ramifications on a wide range of practices. But, cast it too narrowly, and it is easy for providers to avoid any requirements by slightly tweaking their products and practices. Unregulated BNPL is becoming significant Short-term interest-free credit used to purchase more substantial items (as labelled by the Treasury and FCA) is not what the lawmakers and regulators are concerned with – it is not what is growing rapidly or causing detriment to consumers. The focus of their attention is what they call unregulated BNPL agreements, which typically target lower value items, often nonessential and fast consumable items like clothing. This is big and growing with estimates of over £5 billion last year, and projections into the tens of billions by some analysts. There is potential for BNPL to be much, much bigger If the wider market foray into BNPL continues, it will likely cannibalise existing lending, particularly of credit cards, but it may also increase spending levels overall. Should BNPL purchases shift upward in value, this will see total exposures grow quickly. Individual online retail shopping amounts for BNPL are relatively low. But aggregating spending over multiple purchases for a customer mounts up. If purchases shift to more substantive goods – the territory of short-term interestfree items mentioned previously – it will account for a sizeable chunk of the quarter trillionpound unsecured market. Having the largest BNPL providers sit outside the regulatory perimeter, or inconsistent practices between lenders undermine the whole unsecured market. The outlook for BNPL providers Analysis by Redburn, as reported in the FT, suggests BNPL providers that only offer this product are unlikely to be sustainable in the long run. Whilst they look attractive today, they will soon be outgunned by incumbent lenders. However, those able to deepen their offerings and relationships with a broader suite of products and services will see the sustainable value, leveraging BNPL as an effective acquisition generator for new business. This reinforces a further point, that the type of customer who is attracted to and uses BNPL now is younger and without a credit history. Yes, BNPL may be positive for greater financial inclusion, but it also points to a possible vulnerable customer group who are less aware, less financially astute, less resilient, and so more susceptible to harmful practices. Providers should therefore aim to build on that foundation with a very clear long-term perspective. A view that covers decades not just the next few years, this is how BNPL can become the backbone of how people spend on low to moderate purchases when requiring credit. About the author: Phillip Dransfield is Partner at 4most, a UK based, credit and life insurance risk consultancy and is recognised internationally as one of the most dynamic and successful risk consulting firms.