“In the past, credit cards provided everything in the one instrument, including the line of credit, purchase guarantee, receipts, reports etc,” said Zurawski. “Now there is an opportunity to provide these elements via different suppliers, leading to notional, small-scale account pooling, for example. This is being driven by the API movement.”
As reported in Club@Sibos here some online retailers see PayLater (often referred to as Buy Now, Pay Later – BNPL) as an opportunity to improve their customer service and reduce the number of abandoned purchases online.
BNPL is an instant online payment facility that offers customers the ability to use traditional bank loan financing to pay for goods purchased online. By selecting Pay Later at the point of purchase, customers are provided with available loans from their banks; they can then select and initiate a loan, knowing that the funds can immediately be credited to the merchants and items dispatched. By offering the Pay Later option, merchants are in turn able to offer a wider variety of purchase options and to reach a wider consumer audience, while still ensuring surety of payment.
Pioneered by British fashion and cosmetics online retailer Asos, BNPL means that shoppers can ‘buy’ as many items as they want against their account (users sign up and register a payment card against the account) and anything that they don’t return is charged for.
Since then, many retailers have started to offer this service. Swedish payment services company Klarna has been at the forefront of BNPL. It provided payment solutions for 60 million consumers across 100,000 merchants in 14 countries. Investors in the company include Sequoia Capital, Bestseller, Permira, Visa, Atomico and, most recently, US rapper Snoop Dogg.
Swift’s standard, called the Transactional Finance Application Programming Interface, is designed to facilitate the more widespread adoption of the BNPL model by both merchants and banks around the world. Using this single standard, merchants will be able to implement the Pay Later option, ensuring they are able to reach multiple banks around the world and avoid multiple costly individual implementations.
A working group on the Pay Later API standard includes banks, merchants and technology providers. The group will continue to work together to evolve the standard API specifications and rulebook. The aim is to create the conditions for the Pay Later platform to provide optionality to customers, to give merchants a greater ability to sell their goods and to ensure a wide reach for banks.
Stephen Lindsay, head of standards at Swift, said the API was an example of the role standardisation plays in enabling the banking industry to take advantage of every technological innovation.
Tony McLaughlin, managing director, Treasury and Trade Solutions at Citi, said the API would support banks’ transition to digital platforms. “The API will enable banks to maintain the vital lending relationship, whilst driving growth of the global digital economy.” He added that the interface would provide the basis for future innovations in platform banking.
Zurawski said Pay Later is a new retail payments trend, with particular interest from small business retailers and small banks as real-time and instant payments are rolled out. “Small businesses are looking for different terms from their banks, including lines of credit and alternatives to payment cards,” he said.
Zurawski doesn’t anticipate a dramatic change in the way consumers purchase goods as a result of the API, but says it is more an indicator of a trend. There was a bigger question, he said, about how the credit process will work in the digital age. “PSD2 is trying to create a framework of rules to ensure safety in the digital payments world. It may also be time to look again at the EU’s directive on consumer credit, which was last updated in 2008.”
Concerns about consumer safety have been raised in Australia, where the Australian Securities and Investments Commission (ASIC) published a review of BNPL in November 2018. “The market for these arrangements is diverse, evolving, and growing rapidly,” stated the report. “The number of consumers who used at least one buy now pay later arrangement has increased about five-fold from 400,000 consumers during the 2015-16 financial year to over 2 million consumers during the 2017-18 financial year. This represents about 10% of the adult population in Australia.”
The review found that 86% of Australian consumers who had used BNPL planned to do so again, believing the arrangement allowed them to buy more expensive items, spend more than they normally would or make more spontaneous purchases.
“Buy now pay later arrangements can create some risks for consumers if they take on debt that they may have difficulty paying back. To make a scheduled repayment on a buy now pay later arrangement, some consumers delayed paying bills, became overdrawn, or borrowed money from family, friends or another loan provider,” said the review.
While providers of BNPL arrangements took some steps to help consumers make informed decisions, only one out of six of them examined the income and existing debts held by consumers before providing their services. “We also received reports of instances where consumers were allowed to use a buy now pay later arrangement despite having limited or no income and substantial existing debt.”