Despite negative market, BNPL changes present an opportunity for software companies

This article outlines the impacts of regulatory change and a downturn in BNPL services, and how software companies can proactively reduce their risk while continuing to offer multiple payment options to customers.

The Federal Government’s 2019 inquiry into Credit and financial services targeted at Australians at risk of financial hardship, subsequent consultation into regulating buy now, pay later (BNPL) arrangements, and Openpay’s recent fall into receivership signal challenging times ahead for BNPL in Australia.

Since BNPL services started gaining traction in 2015, consumers have used a range of providers to access the products and services they need without needing upfront payment. Similarly, merchants have offered BNPL to provide more payment options, allowing customers to make larger transactions than if they had to pay upfront while the merchant receives payment in full (less fees) from the BNPL provider.

When handled responsibly, BNPL services can provide businesses and consumers with the cash flow boost they need. After all, big companies can do the same by drawing down on a line of credit or increasing their debt facilities, quite often overnight. However, rising interest rates and the ability of BNPL providers to remain solvent over the coming years present a reputational risk to software companies that offer BNPL integrations to their merchants.

Considering alternative payments providers with split and scheduled payment functionality can help to mitigate this risk while allowing software companies to build a revenue stream from a process that already happens every day — transactions. This article outlines the impacts of regulatory change and a downturn in BNPL services and how software companies can proactively reduce their risk while continuing to offer multiple payment options to customers.

Rate rises and regulation will destabilise BNPL in Australia

The prospect of splitting payments into regular instalments is an attractive one for a society that values instant gratification and the need for a cash flow boost until payday. In the 2021-22 financial year alone, $16 billion worth of transactions were processed by BNPL providers, a 37 per cent increase on the 2020-21 financial year. This growth has been spurred by two key factors: record-low interest rates and the ability for providers to operate in a regulatory blind spot.

Low-interest rates have allowed BNPL providers to access low-cost working capital and corporate debt facilities. And by currently operating in a regulatory blindspot, BNPL providers have been able to give consumers $1,000 to $3,000 instantly, with no interest charges or fees (provided that payments are made on time). Larger amounts up to $30,000 can be accessed for larger purposes, but these can attract establishment charges and monthly fees.

One of the most appealing aspects of integrating BNPL services into your technology stack is the ability for your users to get paid upfront while a customer pays the remainder of their bill in instalments. This model may be suitable for now, but it is predicated on the assumption that consumers will still be able to access credit instantly through a BNPL provider and that BNPL providers will remain solvent throughout this high inflation and high-interest-rate environment.

Further, with merchant service fees ranging from 3 per cent to 4 per cent, compared to Visa and Mastercard fees – via an IP – usually ranging between 1.25%-1.75%, the cost of offering BNPL services puts a dent in profit margins at a time when high input costs are already a challenge. There is also the possibility that, as interest rates rise, BNPL providers may pass this onto merchants through fee increases, just as the banks pass rate rises onto their customers.   

BNPL providers and merchants are in the hands of policymakers

There are currently three options on the table detailing how BNPL providers in Australia will be regulated:

1. A light-touch regulatory approach where an affordability test would be added to the new account process.
2. A middle ground where BNPL providers would have to hold an Australian Credit Licence and follow responsible lending obligations, including an “unsuitability test” for products.
3. BNPL providers fully regulated under the Credit Act, requiring the same application and assessment process as credit cards. 

The end result will depend on the ability of BNPL providers (and their lobbyists) to convince policymakers of the best approach for their businesses, industry and customers. In any case, software companies who provide BNPL currently are at the behest of policymakers. Greater regulatory oversight could see the ability of customers to access BNPL credit hampered, while the ongoing costs of offering BNPL will continue to reduce your user’s profit margins.

Integrated payments provide more flexibility and control

Often the best move in business is offence, especially in a challenging economic environment. With the prospect of regulatory change to BNPL services in Australia, plus the lack of control and flexibility software companies (and their users) can exercise over BNPL transactions, bringing payments in-platform will allow software companies to continue offering a range of payment instalment options while building a new revenue stream. This is particularly important for vertically-integrated software companies in health and wellbeing, veterinary services, and field services. 

Transaction values in health, veterinary care, and field services tend to be higher than those in retail, with services such as dental procedures, household repairs and maintenance, and veterinary care costing customers thousands of dollars. Further, with 84 per cent of electronic transaction volume being “default payments,” which are those scheduled for regular payments, offering customers seamless ongoing payment options makes it easier for businesses to provide a competitive payment experience and strengthens user retention.

Unlike BNPL providers, integrated payments providers allow software companies and their users to manage recurring billing for electronic direct debit requests (eDDR) from within their platforms. This added flexibility and control means that the integrated payments provider can capture the transaction and profit share it with the software provider. In contrast, with a BNPL integration, transactions go straight to the provider, and merchants are charged a fee.

Transitioning to in-platform payments is seamless

There are three key options available to software companies when bringing payments in-platform: legacy referral agreements, becoming a full payment facilitator (PayFac), or leveraging PayFac as a service. A referral partnership offers little to no ability to customise and control your customer experience or payments infrastructure, while becoming a full PayFac can be costly and comes with burdensome compliance requirements. Instead, software companies can partner with an integrated payments provider, such as Payrix, to continue offering payment options to customers and grow a new revenue stream. By opting for PayFac as a service, risk and compliance are largely managed by the provider. 

Payrix’s solutions for software platforms allow software users to offer a range of payment options to their customers. With a single REST API integration for all payment types and channels and customisable fee structures, your users will be able to offer customers more comprehensive instalment options than those offered through BNPL providers. These options include:

• Instalments: The invoice is split into instalments over time. The payment amounts, frequency and time frame can be customised to suit the customer’s needs, and you receive a share of every transaction that’s processed.
• Deferred/split terms: Your users can get customers onboard faster by offering the ability to pay a deposit with the balance due at agreed-upon future dates.
• Recurring payments: Your users can set up recurring payments with customers, ensuring they’re paid on time, every time while increasing customer retention rates.

Say goodbye to BNPL and hello to better payments with Payrix

Managing multiple payment providers and having poor visibility and control over payment processes is a key risk that software companies can’t ignore, especially as Australia’s BNPL sector faces economic and regulatory instability. Proactively manage your payments, grow a new revenue stream and ensure your users can continue offering customers a range of payment options by partnering with Payrix. 

Our platform is built on robust infrastructure, ensuring a secure and seamless payment process for vertically-integrated software companies and their users. And with a local team of experts, you’ll have support throughout your entire payments journey so you can get the most value possible out of bringing payments in-platform now and into the future. 

Don’t risk the continued volatility and uncertainty in Australia’s BNPL space. Get in touch today to see how Payrix can help you get ahead of changes in BNPL while building a new revenue stream in the process.