Paying it forward

Max Chuard, Chief Executive Officer at Temenos believes the banking technology provider’s ‘Explainable AI’ is the answer to a growing problem

How we bank, where we bank and who we bank with is changing dramatically. These incredible shifts are being driven by customers wanting and demanding more than ever before. And, if evidence were needed, the rise of buy now, pay later (BNPL) would be a good place to start.

Consumers today are used to fast, seamless and personalised experiences, just like those they receive from global entertainment and e-commerce platforms such as Netflix or Amazon. And this is what they want and expect from financial services, too: an intuitive journey with banking embedded into everyday interactions.

This is what BNPL provides, as an alternative form of credit, embedded into the point of sale. So, when customers find something they wish to buy, they can immediately benefit from a BNPL loan, without having to be diverted to a separate financial services journey or provider. Decisioning is fast, hard credit checks are rare and there is typically little to no interest charged.

The idea of paying in instalments is not the new part – in fact, that’s more than 100 years old. What is groundbreaking is how today’s technologies – like open APIs, Cloud and artificial intelligence (AI) – have created new levels of speed, scalability and seamless integration into consumer platforms. This is driving rapid growth. Around 360 million people currently use BNPL. By 2027, this is expected to triple to almost 900 million, according to new figures released by Juniper Research this autumn. This is likely to lead to market growth of 45 per cent each year between 2021 and 2030, taking it from $132billion in 2021 to $850billion in 2026, according to a Buy Now, Pay Later Market report by Straits Research, published last July.

One example of the kinds of developments fuelling this trend is PayPal’s use of Temenos Banking Cloud to launch its BNPL solution in multiple jurisdictions. The results were dramatic: 48 million BNPL loan applications have been processed in two years, with 750,000 on just one Black Friday alone.

SHORT-TERM GAIN, LONG-TERM PAIN?

The rapid rise of BNPL comes as much of the world is facing a cost of living crisis, fuelled by rising inflation and energy prices. We are seeing this impact in BNPL, with another recent study by LendingTree, in April, finding that 42 per cent of consumers paying in this way have been late with at least one payment.

In a sense, the ease and convenience of BNPL creates its own challenges. Because customers can purchase items in such a fast and frictionless way, they may do so more impulsively. Our inherent behavioural biases favour the concept of ‘buying now’ and ‘paying later’. We prefer to focus on rewards in the present, rather than on implications in the future. This is known as ‘present bias’. Meanwhile, future spending obligations are often underestimated, a phenomenon known as ‘atypicality neglect’.

Further examination of these topics is best left to behavioural scientists. But what’s clear is that all of us in the BNPL value chain need to do more to help consumers make more responsible and informed spending choices.

BANKS + EXPLAINABLE AI = A SOLUTION

As concerns for consumer protection have grown, regulatory scrutiny of BNPL is naturally following. Global regulators are increasingly looking at areas like credit checks, transparency and education. And, as many commentators, such as S&P Global, have noted, this provides an opening for banks to enter the market, and take on the pure-play BNPL providers.

Banks are used to regulatory scrutiny in a way that new providers are not. They’re also well-capitalised, at a time where borrowing costs for new players are increasing. But perhaps the biggest strength banks have is the trust their customers have in them. In fact, 50 per cent of people would prefer to have BNPL provided by their bank than anyone else.

What this relationship affords banks is a wealth of customer data, including expected monthly income, spending obligations, past transaction history and even job status. Knowing more about their customers allows banks to offer different forms of BNPL. One example is ‘pay later’ services, where banks can retrospectively offer customers the ability to convert eligible previous transactions into a BNPL loan. This would provide some relief to those who may be struggling

Hitting the button:

Banks offering BNPL could make sense for them, and consumers

Unlike in any previous large-scale financial crisis, data is now available in huge volumes and, thanks to Cloudnative platforms, FIs have the ability to mine it for insights that can underpin valuable new services

with cash flow, while allowing the bank to manage default risk by selecting those who already have their credit risk underwritten. And when this customer data is harnessed by an AI engine that is transparent and explainable – such as Temenos’ patented Explainable AI platform – rather than a ‘black box’, there is even greater potential to make a positive impact.

Let’s look at how this works in practice: In a typical online purchase scenario leveraging our Explainable AI-powered BNPL service, the customer is presented with the bank’s BNPL payment option at checkout for their purchase. They are given the option of different BNPL ‘flavours’ (instalment amount, frequency, duration, interest rate), which the bank has pre-determined. At this point, the customer will be presented with Explainable AI-driven estimates regarding their future spending ability, such as expected net disposable income. These estimates are coupled with easy-to-understand insights, in plain language, that outline the key drivers behind that calculated figure. Customers can also receive recommendations for budgeting adjustments they need to make to better afford the various BNPL options.

TECHNOLOGY HOLDS THE KEY

The result is a ‘win-win’ for all parties. For banks, this positive use of customer data allows BNPL to be an additional revenue stream that builds loyalty and trust, while controlling delinquency and compliance risks.

By offering BNPL directly under their own brand, banks are also able to better engage with otherwise hard-to-reach, digital-native Gen Z customers who are major BNPL users. And, for the customer, it maintains the frictionless BNPL experience, but in a way that helps them to make informed spending choices, countering the inherent behavioural biases we all face at a time when this is needed most.

So, just as digital technology enabled the ease and scalability that led the market to its current level of growth, Explainable AI can be the key to making this growth sustainable in the future.

It’s a great example of how, together, we can make banking better.