Over the past few quarters, the financial services industry has been buzzing with discussions about regulatory parity in the buy now, pay later sector, and its implications for both consumers and merchants. While attention is often focused on the financial aspects of BNPL, such as high interest rates, late fees, and increased financial stress among consumers, a crucial issue that deserves more attention is data collection and digital consumer surveillance by the BNPL sector. This little-known concern has far-reaching implications, prompting regulators to step in and address this growing problem.
BNPL has grown rapidly in recent years, leveraging open APIs, cloud technologies and, most notably, artificial intelligence to improve its ability to target potential buyers. The AI revolution, which is advancing at breakneck speed, presents both opportunities and risks. In the wrong hands, the vast amount of data collected by BNPL companies could not only put merchants at risk, but also have serious consequences for consumers. As concerns over consumer protection continue to grow, it is only natural that regulatory oversight will become an integral part of the BNPL landscape. Marketers must remain vigilant and stay abreast of the evolving dynamics of digital surveillance in this evolving environment.
A disconcerting reality Consumer Financial Protection Bureau cited is that BNPL companies collect consumer data in ways that introduce invisible risks and violate privacy. However, data collection transcends privacy and security concerns; it also has consequences for merchants’ bottom lines. BNPL providers often hijack the relationship between merchants and their customers, relentlessly remarketing new brands, driving consumers to continually search for the best deal.
BNPL companies are relentlessly seeking to become profitable. By diversifying their offerings, their ultimate goal is to put themselves in a position of power where they own and influence the consumer’s purchasing journey. These intermediaries are trying to become “commerce super apps”, encompassing a full range of services, from irresistible offers to price comparison engines, making the purchasing decision based on price rather than value. McKinsey Report notes that Afterpay and Klarna app users “are engaged and loyal, transacting through these apps every month.” But what does this mean for traders?
In an age where data is gold, the implications of these third-party BNPL companies directing the consumer to purchase from a competitor have far-reaching implications. The trend toward commoditizing the purchasing process will ultimately weaken the connection between merchants and their customers, impacting customer loyalty and lifetime value.
Retailers must now weigh the benefits of these partnerships with the long-term risk that such AI-powered engines will destroy loyalty.
It’s no wonder regulators, including the CFPB, are stepping in to address these growing concerns.
Some of the main areas of their concerns include:
- Data collection and digital monitoring: They fear that BNPL companies will entice consumers to sign up without openly disclosing that they will sell their personal data to the highest bidder.
- Improved transparency: Improved transparency providing consumers with a clearer understanding of interest rates and late fees when signing up with a BNPL lender.
- Enhanced Consumer Privacy: By applying the same data privacy regulations to BNPL that credit card companies and other financial institutions must adhere to, regulators aim to prevent the misuse of personal information.
However, it is essential to recognize that not all BNPL providers operate in the same way. There are a wide range of business models, and some choose not to monetize customer data. In fact, there are next-generation models that actively promote customer loyalty, merchant branding, and ardently protect personal information. For retailers strategizing their installment payment needs, these alternatives merit careful consideration.
While the CFPB is expected to propose new rules to govern the BNPL industry, Australia has already implemented them and the EU is not far behind. Australia announced in May, BNPL would be regulated in the same way as consumer credit. In cases where BNPL providers allow consumers to use their own existing credit cards to make purchases with interest-free installments, they will most likely see no change in the way they do business since they already fall under the various consumer protection services around the world. Overall, the decision retailers face about how they enable consumers to shop goes beyond the immediate need for profit margins and short-term gains. It is fundamentally a question of balance: a balance between seizing the opportunities offered by the extensive offerings of BNPL companies and preserving the privileged relationships maintained with their customers.