Zilch positioned to be major player in BNPL space
The buy-now-pay-later phenomenon, or BNPL, offers many important benefits for young consumers strapped by the pandemic-related shutdowns. But some regulators believe that this rapidly-expanding form of consumer credit is strapping young people with more debt. As a result, UK regulators are tightening controls on BNPL vendors in the name of consumer protection. But one company, Zilch, has managed to win regulatory support.
What is BNPL?
BNPL is a fintech innovation that allows merchants to easily offer short-term financing to cash-strapped customers. Using a BNPL lender, shoppers can quickly and easily spread payments over several weeks or months, at little or no cost to them, provided they make the payments as scheduled, which are usually done by automated bank draft. While the practice was originally web-based and limited to Internet transactions, mobile technology is increasingly bringing the BNPL to in-person retail and service industry transactions.
The industry’s growth over the past year has been phenomenal:
- Since the beginning of the COVID pandemic, over 5 million people in the UK alone have begun using BNPL.
- Globally, BNPL use nearly quadrupled in 2020, and total UK transaction volume now tops £7 billion.
- A report from Kaleido Intelligence estimates that by 2025, BNPL will account for 12% of all e-commerce spending, amounting to $680 billion – nearly double the $353 billion consumers spent via BNPL in 2019.
- Bank of America analyst expects the BNPL market could grow by 10 to 15 times by 2025. Eventually, total annual BNPL sales could reach $1 trillion.
BNPL vendors like Zilch, Affirm, Afterpay, and Sezzle have proved wildly popular, especially with younger consumers and “digital natives” who are comfortable adopting mobile and web-based technology to access consumer credit, rather than relying on more traditional bank loans and credit cards. While smaller fintech companies still dominate the space, larger companies are moving in, with major financial services corporations like American Express, Citi, and Chase recently rolling out their own BNPL solutions.
Retailers are also embracing the BNPL concept: it allows them to offer a benefit very similar to ’90 days-same-as-cash,’ but without taking on the risk themselves and the cost of underwriting. They also don’t have to tie up capital. All it costs is a percentage of the transaction, which typically runs between 2 and 8%. That’s more than a discount rate on a credit card, but merchants also have no exposure to chargeback or credit card fraud risk. But despite the product’s reach, UK regulations generally exempt BNPL vendors from scrutiny.
While BNPL lenders and consumer credit card issuing banks provide a similar benefit for shoppers, there is a key difference in their approach and fee structure: The banks focus on collecting interest and fees from consumers, along with discount fees from merchants. BNPL lenders usually rely much more on fee income from merchants. They focus on smaller loans – typically just a few hundred dollars or pounds. This allows them to charge little or nothing to the consumer – as long as they make payments as scheduled.
In a recent report commissioned by the FCA’s Board of Directors, former FCA interim chief Christopher Woolard found the growth of BNPL and other online lenders brought a number of benefits that many customers find valuable. Among them:
- Smooth ‘customer journeys’
- 24/7 account access
- A 100% digital environment
But, regulators expressed concern that some of these same features could wind up excluding some consumers – especially those who are less computer-savvy or have more limited access to the internet. The FCA is also worried that BNPL lenders were making it too easy for unsophisticated or desperate borrowers to rack up thousands in debt, potentially incurring late fees and other penalties that put them further in the hole.
“Unaffordable credit can damage the lives of people who are already struggling to manage everyday expenses,” said FCA Chairperson Charles Randell. “While we have made progress in reducing unaffordable debt in the years before coronavirus, the pandemic has had an unequal impact on households. Many people have been able to reduce their debts, but some of the poorest in our society have exhausted any savings or run up more debts,” he added.
But things don’t have to be that way, says Philip Belamant, founder of Zilch, a prominent London-based BNPL provider. Zilch’s platform allows customers to split payments into four installments, spread out over six weeks – at no charge to the consumer.
“Our approach is, we don’t charge interest, late payment penalties, or any fees to the consumer whatsoever. There are no hidden fees of any kind,” explains Belamant. “If the customer cannot make a payment we consider that a failure on our behalf.”
The Zilch platform uses Open Banking technology and artificial intelligence to estimate what their customer can afford. Typical initial purchases are limited to a few hundred dollars – limiting the potential damage if the customer should experience financial difficulties. They may qualify for a higher spending limit after proving themselves in their first few transactions.
“In practice, our combination of Open Banking and AI tech works very well, “Belamant says. “This technology is important because it enables a real-time view and understanding of a customer’s affordability, as opposed to ‘creditworthiness’. When you can accurately estimate affordability, you won’t lend people more than they can afford to pay back. This helps eliminate the possibility of indebtedness and credit-related anxiety.”
Not all BNPL vendors are as forgiving with customers, nor have they been as successful in assessing affordability problems. At present, Zilch is the only major BNPL provider to use Open Banking technology, artificial intelligence, and soft-credit checks, rather than hard credit pulls, to assess loans.
Additionally, some carriers have imposed hidden fees and penalties – especially for late payments. Depending on the lender, penalties for missed payments can range from freezes on further purchase activity to collection fees and penalty interest rates as high as 30%. While other BNPL vendors do not run a hard credit check for new applicants, they do report late payers to consumer collection bureaus, which may limit their ability to obtain credit in the future.
It was the hidden costs and loopholes that prompted the FCA to crack down on BNPL vendor activity in the UK as of early February 2021 – except for Zilch. This is because Zilch has already worked closely with the FCA for more than a year under the Regulatory Sandbox Programme.
“It’s important to protect consumers from the more predatory practices of the financial services industry. But we can do that without throwing the baby out with the bathwater,” says Belamant. “Yes, our industry is growing fast – because we provide consumers a valuable alternative to more expensive forms of credit, like bank-issued credit cards.”
The FCA seems to be in agreement with Belamant on this point: The FCA’s report acknowledges that the credit market needs more alternatives to higher-cost forms of credit. Mr. Woolard’s report recommends that the FCA work with the Government and the Bank of England.