Can P2P lenders leverage success in the growing BNPL market?



Peer-to-peer lending platforms are well placed to become dominant in the lucrative buy-now-pay-later (BNPL) field, according to experts from software firm Q2 and Mindtree.

Dominic Reid, senior strategic partnerships manager at Q2, and Chetan Parekh, head of banking, financial services and insurance, UK and Europe, at Mindtree, have both witnessed the enormous growth of BNPL over the past couple of years, and Reid credits fintech innovation with the success of this burgeoning market.

“Then there are the economic factors such as the financial impact of the pandemic coupled with the cost of living crisis, meaning customers are really actively looking for alternative ways to finance  their purchases,” he says. “But overall, I think customer expectations are driving this surge. Customers now expect different payment options at the checkout.”

Q2 and Mindtree have co-innovated to build alternative credit and payments solutions to meet the rising demand for BNPL services across the industry.

With this BNPL solution, financial institutions will be able to provide alternative payment methods to lenders. This will allow merchants to grow sales by offering convenient and seamless one-click checkout experiences, personalised real-time payment options, and the flexibility to shop now and pay later over a period without interest.

Several P2P platforms have signalled an interest in the BNPL market, and both Reid and Parekh agree that P2P and BNPL are natural partners. Parekh believes that P2P lenders will “dominate this market in the future”.

“There is a lot of synergy between the P2P and BNPL space,” says  Parekh. “And potentially it could be that some day retail investors fund the BNPL loans. We’re seeing that happening already in some other jurisdictions.”

Reid has a slightly nuanced view: “My predictions are that this is a market which will continue on its high growth trajectory, however given the impending regulation coming this is likely to cause a dip for the alternative lenders who may have developed their BNPL platforms in house meaning they may not be flexible or scalable enough to handle regulatory changes.

“In addition, as we are already seeing the tier 1 retail banks will be coming into the market with new BNPL propositions to defend themselves against the alternative lenders. But overall I would expect BNPL to become a standard payment option at the checkouts.”

The BNPL market has grown at rapidly without regulation, but it is coming. Last year, the UK government announced that it would be coming up with a framework to regulate BNPL more effectively in order to protect consumers from harm. This could significantly slow down the growth of the BNPL market.

“BNPL is expected to grow, but I think the regulation will decide whether it grows at the same rate that we witnessed in last year Europe,” says Parekh.

“If you take a step back and look at the challenges you would normally face with respect to traditional credit checking, it’s all about the high rejection rates, then the high probability of default, then also the quality of the borrower.

“This means integration with various data sources is key because in BNPL you don’t have a credit history track record for the unbanked population especially. At Mindtree, we provide a number of offerings in that space with our cognitive financial risk decisioning solution which allows our customers to opt for alternative database financial risk decisioning so that they can acquire creditworthiness.”

While there are plenty of innovative fintech solutions available to improve BNPL services, regulation is likely to slow down the pace of progress. However, the opportunity for P2P lenders is immense. The global BNPL market has been predicted to grow to $4trn ($3.2trn) by 2030, and companies such as Q2 and Mindtree are making it easier for new fintechs to enter the space.

“There’s a lot of noise in the market about both of these solutions, both P2P platforms and BNPL,” says Reid. “But you could also say that they’re in their infancy.”

Give it a few years, and P2P lenders may dominate the BNPL market after all.