Introduction
Imagine a young professional in London, juggling rent, bills, and the occasional splurge. Like millions of others, they’ve discovered Buy Now, Pay Later (BNPL) services. The ease of splitting payments into manageable chunks feels empowering. But beneath the surface of this convenience lies a growing concern—for both consumers and lenders.
As BNPL usage soars, issues like mounting debt, missed payments, and the lack of financial transparency are becoming increasingly problematic. Lenders struggle to assess credit risk accurately, and consumers, lured by the ease of delayed payments, often find themselves in financial trouble. This is where open banking enters the picture, offering a way to improve the BNPL landscape.
The rise of BNPL
As of 2024, half of UK adults—about 26.4 million people—have used BNPL services. This marks a sharp increase from just 36% at the start of 2023. BNPL has become an essential part of the financial toolkit, especially for younger consumers. But with popularity comes risk. A report by Citizens Advice revealed that 35% of people who regularly use BNPL deals have used the facility to pay for groceries. Over a 12-month period, one in five users had missed or been late with a payment.
This wave of BNPL adoption is a reflection of changing consumer habits – but it’s also more. The simplicity of BNPL can sometimes obscure the financial complexities it introduces. With the tap of a screen, consumers can accumulate debt without a clear understanding of how it will impact their future finances. Open banking can make a significant difference here.
A new portrait of the consumer
In the traditional world of credit assessment, consumers have often been reduced to a single number. But with open banking, a new portrait emerges— with a far more detailed and dynamic view of each customer. Unlike brushstrokes, open banking provides a dynamic, photorealistic view of a consumer’s financial life encompassing real-time data on income, spending, and even the small but significant details that traditional credit scores miss.
With access to real-time financial data, BNPL providers can gain a clearer and more accurate view of a consumer’s current financial wellness, allowing them to offer credit that truly reflects the consumer's ability to manage it—beyond outdated factors like time on the electoral roll or old credit judgments. After all, those new forms of debt—like the BNPL plans themselves—often don’t get reported to credit bureaus, leaving a gap in understanding the true financial commitments of consumers.
The challenges of modern debt
The rise of BNPL has brought with it plenty of sobering statistics. Citizens Advice reported a 67% increase in people seeking help with BNPL debt over the last 12 months. This surge highlights the dark side of convenience—many consumers are finding themselves in financial trouble, sometimes without even realising it.
One of the key issues is that BNPL services can create a false sense of security. The ability to split payments into smaller amounts might make purchases feel more affordable in the short term, but as debts accumulate across multiple platforms, the overall burden can become overwhelming. Open banking offers a solution by providing both consumers and lenders with real-time visibility into these financial commitments.
Responsible credit and user experience
Open banking fundamentally changes how consumers experience credit. By consenting to sharing financial data, open banking – when categorised expertly - ensures that consumers are only offered credit when it's truly affordable. In the BNPL space, where it’s easy to accumulate debt across various platforms, this level of precision is crucial. Consumers are no longer left to guess whether they can manage another payment plan; open banking helps ensure that the credit they receive aligns with their actual financial situation.
And the user experience benefits of open banking are already becoming essential across payments and ecommerce. The seamless integration of financial data into apps and platforms means that consumers can enjoy a smoother, faster checkout process. No more lengthy forms or waiting periods—open banking allows for automated assessments, making the entire credit approval process feel smooth while providing the lenders with much deeper financial detail.
Opportunities for lenders in other sectors
For lenders, the integration of open banking presents new opportunities. Beyond just reducing default rates, it allows them to tap into a market of "credit invisibles"—individuals who may not have a traditional credit history but are reliable borrowers when viewed through the lens of real-time financial data.
Over 5 million consumers in the UK are excluded from the best financial deals due to their lack of credit history. With open banking, lenders can create more inclusive credit models that serve a wider range of customers. This isn’t just about risk reduction; it’s about expanding access to credit in a way that is both fairer and more accurate.
Lenders can also benefit from the speed of data-driven decision-making. According to research from Deloitte, using real-time transaction data can significantly reduce the time it takes to make credit decisions. This not only improves the customer experience but also strengthens the relationship between consumers and financial institutions. When decisions are reached quickly and accurately, consumers are more likely to trust and remain loyal to the brand.
Making BNPL better with open banking
As we look to the future, it’s clear that open banking will play a central role in the evolution of BNPL. With the rise of native BNPL services from tech giants like Apple, the ability to assess and manage credit risk in real time will become even more critical.
Open banking will also enable more personalised financial products. Predictive analytics, powered by real-time data, can offer consumers tailored solutions that meet their specific needs and financial situations. This level of customisation was unthinkable in the era of traditional credit scoring, but it’s becoming a reality as open banking gains traction.
For the BNPL sector, this means more than just survival—it means thriving in a competitive market by offering services that are fast, innovative and responsible.
Conclusion
The BNPL industry is at a crossroads. These facilities certainly offer a level of convenience and flexibility to consumers that has never been seen before - providing flexible finance options to consumers is a benefit. But on the other side, it presents new challenges in terms of debt management and financial stability. Open banking has the potential to bridge this gap, offering a way to enhance credit risk assessment, promote financial inclusion, and empower consumers with a consent managed process that safeguards their financial health.
As BNPL continues to grow, the integration of open banking will be essential for ensuring that this growth is sustainable and beneficial for all parties involved. The future of consumer credit is being shaped by real-time data, and those who adapt to this new reality will be the ones who lead the industry forward.
