As Buy Now Pay Later (BNPL) has become a popular way for consumers around the globe to settle their purchases, Russia’s Central Bank is seeking to regulate this activity. In this exchange with East-West Digital News,, industry pioneer Irene Shvakman – who co-founded Revo Technologies, Russia’s first BNPL service, even before today’s Western leaders appeared – comments on the latest industry evolutions and the need for relevant regulation.
How did BNPL emerge historically?
BNPL is essentially an old banking product that has been reinvented for the 21st century and the modern online shopping experience. Store financing in the form of loans or lay-away plans has been popular since the 1950s. However, these services were typically offered with cumbersome paperwork, application forms, and took days or even weeks for lenders to approve.
With modern technology and new data sources about consumers, the process of making a decision about a shopper transformed from days or weeks to seconds. BNPL as we know it today was born and was initially introduced in online stores in Scandinavia and a number of other markets such as Australia, and the USA around the same time.
Since its launch in 2015, Swedish Klarna, now one of the global leaders, has acquired more than 90 million users worldwide, while Afterpay and Affirm have gone public. In 2021, PayPal launched its own service PayPalCredit. Similar businesses have emerged around the world.
In Russia, we launched the first such service in 2013 – even earlier than Klarna – under the Mokka brand. We also serve Poland and Romania.
Are traditional players from the payment industry also in the game?
The strong demand for BNPL has not gone unnoticed by the traditional banks and payment systems. Mastercard, for example, recently announced the launch of its own installment program. Analysts now estimate that BNPL transactions could reach some $700 billion by 2023 and $4 trillion by 2030 or approximately 12-15% of all online payments.
Why is BNPL so popular?
This growing popularity can be attributed to its benefits for both sides – merchants and consumers. Typically, BNPL is offered on attractive terms to shoppers with little or no interest and works as an alternative to the complicated terms offered by traditional credit card providers.
This implies that merchants subsidize all or a portion of the interest for BNPL – but they do it because, with this payment method, shoppers tend to buy more and make more frequent or repeat purchases.
In Russia, in a recent survey conducted by Mokka, 77% of Gen Z (18 to 25-year-olds) and 73% of millennials (26 to 35-year-olds) said they were interested in pay later purchase options. What’s more, they would most likely be purchasing less, or not purchasing at all, if BNPL were not available in their stores.
Popularity usually comes with closer regulator attention…
Before the emergence of BNPL solutions, traditional banks and consumer finance companies dominated in-store finance. To obtain store financing or a store credit card, consumers would have to fill out long application forms at a specialized desk or kiosk inside the store and wait some time – up to several weeks – for a decision from the lender.
Central banks regulated store financing and store credit cards as typical consumer lending products, with detailed requirements for loan documentation, disclosure, interest rates and fees, and customer identification.
The fintech innovators who aggressively launched BNPL successfully transformed a boring traditional financing product into something trendy for GenZ and Millenials. Integrating the latest data and mobile technology as well as astute knowledge of consumer finance regulations, these fintech players launched interest-free BNPL products and largely evaded the regulations which had been in place for decades, governing consumer finance in some of the most established markets, such as Australia, the UK and the USA.
However, as BNPL became very popular among merchants and consumers and the value of such transactions skyrocketed in recent years, regulators began raising concerns about the terms and disclosure practices of unregulated BNPL players. Regulators found that some BNPL providers were not properly disclosing the nature of their service, and that many consumers were not even aware that they’re in fact borrowing when purchasing with BNPL. In fact, some consumers accumulate significant debts with BNPL services, while some lenders do not share the related information with the credit bureaus.
For example, the Bank of England carried out a study of BNPL services in the UK earlier this year, and recommended new regulations. These recommendations included changes to the way that BNPL services are communicated to consumers and required sharing the information with credit bureaus. A similar study was carried out by the Reserve Bank of Australia, while the US Federal Reserve Bank recently announced its own review.
In Russia, in November 2021, the Central Bank published a letter to regulated banks and consumer lenders not to participate in “unregulated” BNPL schemes since they purposely circumvent consumer lending regulations. However, this letter has generated some confusion among market participants and certainly has not put a stop to the rapid development of unregulated BNPL schemes in the market.
Be it in Russia or elsewhere, isn’t a clear regulatory framework beneficial to all parties?
Absolutely. Since BNPL services emerged in Russia eight years ago, the leading providers have adhered to consumer lending regulations, under which consumers’ rights are protected. Recently, however, some new players began offering BNPL products that circumvent consumer lending rules. The documentation and legal forms they use aim to evade regulations.
Such practices may harm the development of the market and confuse consumers. For example, non-compliant services may charge consumers higher penalties for missed payments or simply not disclose all of the terms clearly. Furthermore, they neglect to share data about consumers’ obligations with the credit Bureaus, which risks overextending consumers and distorting lenders’ understanding of the risks in their portfolios.
If not addressed by the Central Bank now, these practices could become a significant problem for the market and create further imbalances among participants that adhere to regulations and those that evade rules.
In conclusion, we believe that creating a clear framework for regulating BNPL services will bring positive developments. It will allow players to compete on the basis of customer experience and service quality rather than regulatory arbitrage. In a long term perspective, any financial service and the market as a whole need to earn and maintain consumers’ trust. And this requires clear regulations and transparent practices.
- Irene Shvakman is the founder of Revo Technologies, a leading fintech company which launched Buy-Now-Pay-Later practice in Russia in 2013 under the Mokka brand. Previously, she served in the syndicated loan group at Chase Manhattan Bank in New York and had an internship at the Goldman Sachs investment bank in London. She headed the McKinsey expert group on working with financial institutions in the CIS and Central Europe. Mrs. Shvakman received an MBA-degree from Harvard Business School and a BA in Biochemistry from Brown University. She is a speaker at the Skolkovo Moscow School of Management and the Higher School of Economics with a deep expertise in the development of the financial sector in Russia.
