In Focus

Finance

The buy-now-pay-later (BNPL) finance model is far from a new idea. While merchants had long offered trusted customers easy terms before the early 20th century, such facilities were provided on an industrial scale as the age of consumerism dawned. Large manufacturers and retailers started offering contractual credit that allowed customers to have their goods immediately and pay for them by instalment. In 1919, for instance, General Motors set up the GM Acceptance Corporation to arrange affordable loans that would help millions of US citizens to become car owners.

Customers still like credit and merchants still like to offer it, but the BNPL model has changed considerably over the past decade. Not all forms of it are regulated in the UK – a situation the watchdogs have been wanting to remedy for some time.

A year ago, the Financial Conduct Authority (FCA) published the findings of a review of the unsecured consumer credit market that Christopher Woolard had chaired in 2020 while serving as the authority’s interim CEO. This argued that there was “an urgent need to regulate all BNPL products… BNPL represents a significant potential consumer harm.”

The regulator is particularly concerned about short-term loan facilities that require no down payment and, generally, charge no interest. Brief invoice deferrals of this type have traditionally applied in situations such as tallying up with the milkman at the end of the week – circumstances where the sums involved are small and statutory intervention would be overkill.

Why has the FCA become so exercised about something that’s been a handy tool for many decades?

A key reason for its increasing concern is that BNPL finance has become such a ubiquitous option in recent years as a seamless part of almost every online purchase. That’s the view of Andres Korin, co-founder and CFO of Debite, which offers BNPL finance to young businesses.

The increasingly “embedded nature of lending and the ease of access to data allows any financial transaction to be turned into an instalment arrangement”, he says.

In other words, advances in ecommerce tech have rendered consumer borrowing a little too easy for the FCA’s liking. With just a couple of taps of a smartphone, you can pop a product that would otherwise have been unaffordable into your online basket. The danger is that the wide availability of convenient credit makes it easier for unwary consumers to run up debts they can’t repay.

BNPL in practice

A third of UK adults have used BNPL, according to research by Equifax, with 4.1 million people trying it for the first time last year. Consumers aren’t necessarily resorting to BNPL to get hold of luxury items, either: 12% of consumers have used it to pay for groceries and other essentials.

The FCA says that it’s been “consistently calling for a change to the law to bring BNPL products under our regulation. As soon as Parliament decides the scope of that change, we will consult on the rules that providers will need to follow. Although we don’t yet have regulatory oversight of these firms, we’ve already secured changes to unfair contract terms and warned them about misleading adverts.”

The Woolard review notes that the sector’s advertising “often focuses on aspiration, tapping into consumer desires to live a certain lifestyle”. It also points to evidence indicating that the customer journey towards a BNPL purchase can be designed to “exploit consumer biases” and encourage people to not think too hard about the fact that they’re getting into debt.

But it also acknowledges that BNPL offers several potential benefits. It’s much cheaper than most regulated credit options if repaid on time, for instance. And it can be a lifeline to people who’d otherwise resort to using a payday lender – or worse.

A legislative balancing act

Azad Ali leads the UK and EU financial services regulation practice at the London office of international law firm Skadden, Arps, Slate, Meagher & Flom. He believes that the government has so far been “very thoughtful and measured in its approach” to regulating the sector.

“It wants to maintain short-term interest-free credit options in the shape of products such as cycle-to-work schemes, store charge cards and season-ticket loans, but also to prevent BNPL borrowing that can pass under the radar and leave consumers overextended,” he says.

Ali expects the government to introduce statutory consumer protection measures covering pre-contractual information, creditworthiness checks and the form and content of credit agreements. But he stresses that it is “concerned not to stymie ongoing trends in digitalisation. That concern extends to acknowledging the merits of innovation in the consumer experience.”

Ali adds: “The government is also mindful that distinctions between traditional instalment payment plans and BNPL can be blurred – and that the more familiar instalment options can be a source of harm to consumer. It has therefore expanded the purview of the consultation.”

The key challenge to the legislators is how to keep BNPL credit as accessible as possible while also protecting people from accumulating excessive debts. How, for instance, can a potential customer’s overall credit exposure be tracked without making BNPL finance too onerous for them to use – and too costly for providers to offer?

Could open banking accelerate credit checks?

Steve Perring is head of compliance and risk at Deko, which provides multi-lender checkout finance options for merchants. He suggests that the use of open-banking data could help with creditworthiness and affordability assessments.

“Considering that BNPL products are driven by innovative technology, it seems that the two would go hand in hand,” he says. “In fact, open banking could help to enhance affordability assessments across the consumer lending market, giving lenders access to information verifying a potential customer’s income and expenditure.”

But open banking has been something of a damp squib to date. The total number of retail payments in the UK stands at about 2.9 billion a month on average. In October last year, a mere 7.1 million open-banking payments were made, according to the Payment Systems Regulator. The government’s joint regulatory oversight committee on the future of open banking will shortly be publishing a report discussing how to boost that number.

But, if consumer uptake increases significantly, there are several barriers to using open banking for affordability assessments. The first of these are cost and licensing considerations. Firms might need to be licensed as an account information service provider, or at least partner with one, to access bank account data. To be able to manage loan repayments, they would need to be licensed as a payment initiation service provider.

“Both of these options would require additional systems and controls, of course, and compliance oversight,” says Perring, who adds that the technology is no guarantee of access to usable data.

“Automated lending decisions based on open-banking data will need to be closely monitored and validated regularly. We have already seen some examples where banks have failed to publish accurate information,” he reports.

There is, then, plenty of work for the legislators and regulators to do. Azad reckons that “it could be 2024 before all the consultations are completed and the new rules come into force”.

If these can achieve the appropriate level of control over the BNPL sector and get the balance of accessibility and consumer protection right first time, they may just be worth the wait.

As the economic outlook deteriorates in the UK, businesses are becoming understandably cautious and keeping a tighter leash on expenditure. More than half (52%) of CFOs responding to a recent survey by Deloitte said that cost management would be one of their top priorities this year, for instance.

Previous polls highlighted priorities such as digital transformations and other longer-term strategic initiatives, highlighting how the finance chief’s remit had tended to broaden over the preceding years. With the economic pressures on business only likely to increase in 2023, must CFOs assume more of a traditional stewardship role in the effort to ensure their firms’ immediate survival?

Not necessarily, according to Sharof Sharipov, CFO of open-banking platform Token.

“It very much depends on the overall health of the business,” he says. “CFOs at companies with well-optimised operations and a firm grip on unit economics will be able to continue allocating their time to transformation projects, say. But, if their business has more pressing issues in other areas that need attention, then such projects may indeed be viewed as a luxury that one can ill-afford.”

While finance chiefs will need to reprioritise certain tasks as a downturn approaches, they should still be able to devote some time to longer-term strategic-level projects for the wider business, irrespective of any firefighting they’re obliged to do. So says Amanda Bennett, CFO at fintech firm Moneyhub, who reveals that strategic matters are likely to remain her top priority in 2023.

“CFOs should not retreat from this part of their role,” she argues. “They may well need to re-evaluate calls on their time if they must focus more on financial matters, but other parts of their job could probably be delegated more easily, and with less impact, than strategic planning. CFOs will continue to focus on cost management and cash preservation, but this should not be to the detriment of their work on product development, for instance.”

‘A critical voice for all strategic initiatives’

For finance chiefs whose responsibilities have expanded in recent years, their involvement in broader strategic decision-making is unlikely to wane even as trading conditions become more testing.

“CFOs are a critical voice at the table for all strategic initiatives,” stresses Kate Vacovec, CFO of Pizza Hut’s operations throughout Europe. “They need to remain both a commercial and strategic thought partner to their leadership teams to ensure the best outcomes for the business.”

Maintaining that guiding influence is, arguably, even more important in a downturn that’s accompanied by myriad other factors – from energy price inflation to supply chain disruption – that could push any business off course.

“All of these things mean that you must be really agile and adaptable,” says Teresa Cameron, FD at payments provider Clear Junction. “You have to look continuously at what’s happening externally and consider how this might affect the organisation, ensuring that you’re supportive as a business partner, whether that’s to the commercial team or to the CEO on a strategic level.”

Delegating some of the routine tasks

Time management is an important skill for CFOs who must juggle day-to-day financial concerns with matters of longer-term strategic importance, Vacovec notes.

“You must be ruthless in prioritising your time, focusing on the most essential, high-impact objectives,” she stresses. “Equally, you must dedicate some time to motivating your teams by giving them clear direction on what’s critical to the business. Agile leaders who think holistically are likely to fare better than those with a narrow vision, a limited scope and a fixed mindset.”

It’s much easier for a finance chief to maintain a holistic overview when they have a reliable team in place. They’re far less likely to get sucked into the day-to-day financial minutiae when they can depend on their accounting colleagues’ ability to handle such matters unaided.

Jim Moylan is CFO of Ciena, a specialist in networking technology. He says: “If you think about the nuts and bolts of the CFO’s task, it’s really tax, treasury and control. I have a very strong controller, a very strong tax guy and a very strong treasurer reporting to me. I hire the best people I can and they enable me to do my job, whatever that happens to entail at a given point.”

Moylan’s current job entails overseeing two strategic projects – involving supply chain optimisation and bandwidth demand monitoring – neither of which is taking a back seat as the economic outlook deteriorates, he says.

Dynamism in a downturn

Finance chiefs who have an extended remit and are therefore more engaged with the wider business are likely to be better equipped than average to lead in a downturn. That’s the view of Razzak Jallow, CFO at FloQast, a specialist in accounting workflow automation.

“The best decisions come from understanding your company’s entire value proposition to customers and knowing which activities generate the most value,” he says. “If a CFO is already at this point, it’s a lot easier for them to know which areas to scale back on when times get tough and which areas to protect.”

Indeed, some people would question whether a modern CFO could ever do their job properly if they weren’t involved in influencing the strategic direction of their company, whether the economy is tanking or not.

“CFOs need an understanding of their business that goes beyond the numbers,” Bennett stresses. “I don’t think they can make judgements in the best interests of the business without this. Recognising the real issues outside the latest spreadsheet is always important, but especially so during a recession.”

A lack of contextual appreciation could also lead a CFO to make decisions that might seem financially prudent at first glance but end up doing more harm than good in the long run.

“CFOs with a narrow focus and remit can fall into the trap of overemphasising certain actions that might advance pure financial measures at a non-financial cost to the wider business,” Sharipov says. “Excessive cost optimisation might be viewed as beneficial by ‘extending the runway’, but that risks putting the company into a spiral of workforce deterioration, which would ultimately destroy that business.”

So, while CFOs will focus more on their finance-centred responsibilities when times are hard, anyone who ignores the bigger picture while doing so is putting their firm’s longer-term prosperity at risk.

The requirements of an effective CFO used to be fairly straightforward: be good at managing capital by means of your hard-earned accounting knowledge and administrative expertise. But so much has changed in recent years that these traditional skills alone may no longer guarantee C-level success.

Today’s businesses want technologically adept finance chiefs who can bring both technical proficiency and highly developed interpersonal skills to the table. They must serve as internal statespeople, engaging with other senior executives to form a cohesive leadership team that can navigate the business through any adversity it may encounter

When livelihoods are at stake, the finance function can become a beacon for employees who are worried about the future. This means that its leader must have the emotional intelligence to manage effectively upwards, downwards and sideways.

Adrian Talbot is global CFO of PR company Hotwire Global Communications and acting managing director of Hotwire UK. He stresses that “CFOs need to step up, be noticed and communicate even more in uncertain times. Being inaccessible will only encourage more uncertainty and, potentially, even panic. If the finance executive is nowhere to be found, the situation must be bad.”

An extended period of adversity for several sectors has served to increase the CFO’s influence. A 2022 survey of non-financial executives and managers by Oracle, for instance, found that 87% of respondents considered the finance function to be more important that it had been before the pandemic.

As the function’s importance to other departments increases, the finance chief must spend more time engaging more widely with the business.

Be clear about the challenge

Establishing a rapport with the rest of the organisation is a very different experience from that of communicating with the CFO’s traditional audience in the investment community. It’s likely to require simplifying certain messages to help everyone in the business comprehend how it’s planning to weather the storm.

This task can prove more complex than it might at first seem, according to Eliran Glazer, CFO at project management specialist monday.com.

“The unpredictable economic climate brings with it a unique opportunity to take a new and active role in internal communication,” he says. “When discussing finance, it's crucial that CFOs set realistic expectations while also speaking clearly and breaking down concepts so that they’re well understood throughout the company.”

Mike Winn, CFO at digital marketing specialist MVF, agrees. He would advise any finance chief to “ensure that you’re telling a clear story that resonates with people outside the finance team. Sharing a balanced view of any headwinds and what the business is doing to counteract them is better than painting a wholly positive picture that wouldn’t ring true in this climate.”

The CFO as narrator

When finance chiefs are forming their internal communication plans, they must focus not only on what information they’re going to share but also on how they’ll deliver it. Nadine Pichelot, senior VP of finance at software developer Anaplan, believes that CFOs need to become storytellers, finding a way to deliver a narrative behind the numbers in a way that’s fair to their audience.

“There’s a delicate line to walk between sharing numbers on a slide and opening the books to every interested party. Start by taking stock of the questions that employees want addressed; determine what can and can’t be shared; and identify ways to prepare the audience for what’s to come,” she advises.

This may require the use of infographics, videos or other less familiar formats to support a presentation. It may also entail handling potentially impactful data, such as which projects are most at risk and what’s likely to happen to the share price if they do get scrapped.

“You may not be able to answer every question right now, but you can use data to inform a more open and accessible conversation with employees about what the future could hold,” Pichelot says.

Actions speak louder than words

How a CFO conducts themselves from day to day inside the organisation also has a huge impact on confidence among the workforce. A finance chief’s general demeanour and interactions with other employees can convey a stronger message than anything they might say during formal update sessions.

“CFOs should be transparent and approachable,” Talbot says. “Respect comes naturally with the job, but you’ll get much more of that if you participate in daily activities and establish a solid reputation.”

Enabling employees to get to know you means that, when the time comes to break bad news, you already have a solid foundation of trust on which to build.

“To strike the right tone, simple statements are often best to reassure people, providing that these cover all the facts,” Talbot says. “And body language is important. Many people won’t pay attention to everything that’s said, but they will observe how composed and confident – or otherwise – you seem.”

Know when to hold ’em

Eamonn Quinn, founder and managing partner of the Board Matters International consultancy, would advise finance chiefs never to shoulder the communications burden alone. Moreover, he stresses that “it is not, nor should it be, the CFO’s initial job to be the central internal comms hero. It’s entirely up to team leaders to be clear with their communications, with support from the CFO as necessary.”

There is a much better case for the finance chief to partner with the internal communications team after the announcement and implementation of a restructuring plan, he argues.

“The CFO can be clear on that plan, what it requires and how the organisation is measuring up to it, then help those team leaders answer the key questions that their staff may have,” Quinn says.

The new corporate ‘power couple’

More and more CFOs are indeed working closely with their firms’ internal comms chiefs to shape and deliver their messages.

These specialists can be “pivotal in advising the finance chief how to pitch their speech at the right level”, says Annalise Silver, head of internal communications at MVF. “Cool, calm and collected finance types sometimes appear to speak another language when it comes to their area of expertise.”

Developing a good working relationship with the internal comms chief may even prove a wise career move for a CFO.

“For those finance chiefs who didn’t take the chance to assume a more vocal role when Covid-19 struck, the perma-crisis we’re now stuck in offers the perfect opportunity for them to provide some calm in the storm,” Silver says.