How open banking can make BNPL accessible for everyone

Open banking is revolutionising the finance industry in every possible way, with every segment having so much to gain from it. It’s astonishing that by simply giving users secure and easy access to their financial data, it becomes possible to develop an endless amount of new platforms and services to solve everyday struggles.

With the growing popularity of the concept “Buy now, pay later” (BNPL), it was inevitable that open banking would have a great impact on this segment. 

What is “Buy now, pay later”?

BNPL is quite a simple concept, being a financing arrangement that allows customers to make purchases without the need to pay the product’s full price all at once. Usually, the full price gets divided into a few instalments, which are often interest-free.

Due to the ease of use and a high acceptance percentage, BNPL has become almost a must-have for most online retailers. But, even though many people do not realise, BNPL is still a form of loan.

With that being said, if not considered carefully, this process can lead to negative results when payments are missed or multiple BNPL contracts get accumulated. Zero interest fees can suddenly skyrocket, and your credit score will be guaranteed to take a big hit.

BNPL offers two types of solutions

Even though the majority of the applications are for purchases of lower amounts, currently BNPL is being used for almost any kind of purchase.

For that reason, there are two types of solutions available:

• Split payments for smaller amounts and short periods of time (weeks)

• Instalment loans for larger amounts and longer periods of time (months)

Open banking can make BNPL more accessible

Usually, BNPL service providers perform what is called a soft credit check on consumers before submitting a final approval. This type of assessment has a big flaw, and that is not being able to evaluate with precision whether the client is able to afford the purchase. Since it relies on credit bureaus to gather information, it ends with the same limitations as the traditional lending industry.

On the other hand, by embracing the arrival of open banking, BNPL providers can deliver a better experience to their customers. With access to open banking data and the right set of insights, providers can now perform virtually instant assessments to their customers.

Open banking transforms these assessments from vague and potentially erroneous, to extremely precise and always up-to-date. With this new approach, consumers, retailers, and BNPL providers can enjoy considerable benefits brought on by open banking.

How can BNPL become more accessible?

Just like any other form of loan or line of credit, BNPL in its traditional form refers to credit checks to make a final decision on the approval/decline of an application. Credit checks are completed through credit bureaus and the information they have stored on the customer. This system fails to provide a good assessment of the creditworthiness of a client.

By embracing open banking, BNPL providers become capable to instantaneously analyse the current financial situation of a customer, as well as their habits. With access to this information, they experience a considerable increase in the approval rates and can decide which offers are ideal for each customer.

Other ways open banking can help with BNPL

Even though it has become a very popular form of purchasing goods online and in retail, many see BNPL as a dangerous “offer”.

One of the main critiques revolve around the lack of clarity while presenting terms and conditions, which can result in big problems when combined with the lack of financial knowledge of the customers. All the big players in the BNPL industry offer interest-free options that always come with late fee (or extra interest) charges in case of missed instalments.

Other critiques refer to how easy it becomes to fall into a BNPL debt hole. By facilitating the purchase of big ticket items and without providers knowing how much a customer might have borrowed from its competitors, the total amount of debt can easily spin out of control.

Open banking could solve both of the above challenges. Providers simply need to develop tools that allow customers to keep track of all their BNPL commitments in one place, together with an established system of instalment reminders. Moreover, to better analyse a customer’s status before accepting an application, they can rely on open banking to investigate any other BNPL commitments they might have.

These simple implementations could create a better BNPL environment, both for customers and providers.