It’s been a wild ride for the buy-now-pay-later (BNPL) industry over the last few years.

First it was one of the hottest sectors in fintech, on track to exceed $600 billion in total market value by 2026, driven by a pandemic spike in e-commerce spending. Then things hit a rough patch. Rising interest rates and increasing competition shook up the industry – Klarna lost more than $1 billion in 2022, Goldman Sachs’ GreenSky BNPL division had to write off $1.66 billion that year, and now shares of several publicly-traded BNPL companies including Sezzle and Zip are trading at less than $1. At least one company in the space, Australia’s Openpay, has shut down, laying off 80 in the process.

Now, the industry is facing new challenges as it looks to branch out into new areas, including B2B payments services, frontier markets and sectors including grocery, legal and even travel. New competition is on the horizon from major players like Amazon and Apple, and new technologies are making it easier than ever for companies and users to access these products.

What’s more, consumer debt is on the rise amid rising inflation. According to the Federal Reserve Bank of New York’s Q1 2023 report on household debt, the population is currently holding a record high $17 trillion worth of debt, with stagnant credit card balances and delinquencies on the rise, putting pressure on lenders.

BNPL is entering its second phase, pushing for broad acceptance despite its ongoing headwinds.

This is not unlike what has happened in financial technology as a whole, which effectively “grew up” about 10 years ago and has since become something very different from the scrappy, seed stage industry it once was. Today, fintech is part of the mainstream financial service industry, designing products, offering solutions and building tools that are used by millions of customers every day.

For BNPL, its own evolution comes with both opportunities and obstacles. Expanding into new markets and offering new solutions is helping the industry continue its march toward $1 trillion, while technologies like artificial intelligence (AI) have the potential to support exponential growth on that front. At the same time, headwinds like regulation and new competition are emerging that pose new challenges for the sector.

A new competitive mix for BNPL

In March, Apple announced a new BNPL option available for any retailer that accepts Apple Pay. The bite-sized loans – which carry no fees or interest – are limited to between $50 and $1,000 and must be paid back over the course of six weeks. Convenient for customers, but this could represent a significant challenge to the rest of the BNPL ecosystem, given the ubiquity of Apple’s existing payments platform and technology.

And Apple is not alone.

Amazon has offered its Amazon Monthly Payment BNPL option since late 2022, in addition to working with many third-party providers, and even Google is getting in on the act by allowing customers to pay for purchases in the Google Store over time.

New regulations on the horizon

Not surprisingly, this expansion has attracted the attention of regulators, who have been watching the emerging BNPL space closely.

In September 2022, the U.S. Consumer Financial Protection Bureau issued a report on the BNPL industry that highlighted what the agency considers the three most critical risks facing customers who use BNPL: data harvesting, inconsistent consumer protections, and the potential for overextension. As a result, the CFPB pledged to take steps to regulate the BNPL market “in the near future.”

What might that look like?

The CFPB has suggested issuing guidance to ensure that BNPL providers are subject to the same rules as other credit providers, and might take an active role in supervising BNPL activities as is common in other parts of financial services. For one thing, the Federal Trade Commission has already issued guidance for BNPL companies to help keep them out of trouble while regulations are being formulated.

AI meets BNPL

However, there is a bright spot for the industry: Artificial Intelligence.

As institutions and BNPL providers alike work to tighten up lending and credit risk amid the ongoing banking crisis, machine learning and AI are becoming widely used in the industry, with applications ranging from credit assessments, to risk modeling, to fraud detection and more. These technologies have the potential to not only help BNPL more quickly adapt to revenue opportunities, but also keep pace with new regulations and better manage overall risk.

By leveraging AI to streamline the customer experience, the industry could soon lower barriers to entry without reducing credit standards or otherwise exposing itself to risk. Imagine the convenience of accessing BNPL services if the entire process could be completed while standing at the checkout counter in a store, rather than ahead of time with clunky credit checks and an application to fill out. At the same time, providers would be able to significantly improve decision making by retraining their risk models, expanding data collection beyond the traditional credit check and providing all users with new levels of transparency.

A new face for the industry

While the ultimate impact of all of these changes remains to be seen, an evolving industry calls for different types of skills from those working in it. What got BNPL to this point may not be enough in the years ahead, and that’s very normal in emerging industries.

Again, lessons from fintech can be instructive here.

As that industry experienced its own growing pains, it benefited from the experiences and insights of more traditional finance industry experts. Rather than just the technologists who had built new solutions, it took true industry insiders to integrate those new tools with the existing financial system.

The same will be true for BNPL going forward. The industry will continue to need tech talent, but it will also need experience managing the emerging regulatory landscape and integrating with the established financial services industry, that will come from both industry experts and those with domain expertise. The fact is the market is changing, the challenges ahead will be significant, and BNPL companies need to adapt if they want to keep up.

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