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Riccardo Trubiani - Country Manager Italy at Scalapay

Right now, I'll keep going with a brief explanation of the BNPL industry. So BNPL or buy now pay later is a relatively new method of payment that enables customers to make purchases and pay for them later, usually in installments, which replaces the traditional credit card payments as they usually have high rates of interest and charges. The BNPL markets target younger customers such as millennials and genZ, who are more accustomed to and comfortable with online shopping. Overall, the method is convenient for everyone who wants to make a larger purchase upfront and pay for it over time. However, drawbacks exist and shall be carefully considered by both consumers and regulators. Therefore, we take the occasion to share with our readers a report by the Consumer Financial Protection Bureau, in which trends and risks are analyzed in further detail, with the hope of providing the complete picture of BNPLs.

What are some risk management strategies that Scalapay and other firms in the industry use to deal with customers that do not pay their debts?

Well, to answer this question, I think it's worth explaining what the Scalapay business is. Scalapay is a network business, connecting our merchants with our community of digital shoppers and our mission is to empower merchants to create the best experiences for their customers. So how do we measure this? We measure this by understanding what are the key uplift in conversion rate and other important metrics like average order value, new customers, returning customers and repeat purchases. We want to deliver the best conversion rate for our merchants, and how do we do that? As mentioned, buy now pay later business model is a network business right? So it’s based on balancing the approval rate and default rate so we have the best approval rate in the market because we care about maximizing the conversion rate for our merchants: for example we are the only players in the space that accept payment methods like prepaid cards and American Express, and we trained our algorithms from the beginning in alignment with this mission to minimize the number of defaults and fraud schemes. This is very important because we address bad customers or frauds from the beginning of the funnel and we train our algorithms to maximize the approval rate to deliver the best experience for them and the two sides of the networks moving forward. I think the evolution of artificial intelligence will be a key enabler in those assessments. Techs like chat GPT and all of the evolution of GPT 4, et cetera, I think there are going to be a lot of new techniques to be applied on the risk side.

What are the problems you see in default risk management in BNPL and how would you improve upon them?

I think the main problem is that it's a continuous battle for our risk management team and fraud schemes team in understanding who are the good customers that can be accepted with an approval rate. So there is continuous learning and training of those algorithms to be the best in accepting the best customers for us and for our merchants, which is the most important thing because our business model is very much aligned with what the merchants want. I think that there are a few cases where there could be problems in returning and refunds, so there are chargebacks, fraud schemes, etcetera. So those are all things monitored closely by our risk management team. Overall it is a feedback loop process because you try new algorithms and new techniques, you test, you see how it goes and then you improve.

Are there any applications for Blockchain and AI in BNPL? Does Decentralised Finance have a future in BNPL?

Thanks. Maybe I'll start with decentralized finance because you can never say never in technology, but at the moment I don't see enough maturity of the space to spark any innovation sticking in the market on the BNPL side. In relation to buy now pay later there is still immaturity on the market from a regulatory perspective, unit economics, etc. So you need to understand that buy now pay later is a low-margin business and decentralized finance can have fees, transaction fees, and other costs that could eventually not be good for the final business case, right? So never say never in technology, but in the short term I don't see buy now pay later riding the wave of decentralized finance, while on generative AI I think there are a lot of important applications. Let me tell you why, because in the end, the future of buy now pay later is tied to the future of e-commerce and generative AI will have massive implications on e-commerce. Consider that on average less than 2% of customers that visit any E-commerce website finalize a purchase for different reasons, right? So maybe you can’t find your size. You have a slow website. You forgot your password. You don't have my preferred payment method available. In the meantime discovery platforms like social networks or streaming services are becoming increasingly popular, right? So I read a research lately that on average 80% of time online is spent on these platforms nowadays, so very much relevant, right? Those discovery platforms in the end know more about our tastes and preferences than our friends or spouse. So using the feedback loop or tactics to show us the best content they know how to keep us engaged. They know our tastes, they know our preferences, right? But there is a limit nowadays, so nowadays the limit on those platforms is the amount and variety of content produced. But if you think about generative AI technology I mean what if there are no limits for content? Generative AI can produce exactly what we like, and the implications on retail are likely to be significant because there is going to be no limit for content and the implication will be that trends will probably spread much faster than ever before. Platforms will be much better at predicting purchase intent and niche products will reach unprecedented amounts in the addressable market, so understanding platforms for e-commerce and from an operator that wants to help merchants to sell more and deliver the best experiences for their customers will be key to maintaining relevance as they could become the new e-commerce platform for fashion cosmetics etc.

If you had the opportunity to reshape the industry from its inception with your current understanding of the BNPL space, what would you change about the industry and what would you keep the same?

Well, this is a good question because I don't think I will change anything specific. I mean, I think every challenge is a learning opportunity, right? Probably the real focus for the industry, for those who work in the space, is to find the right talents with the right mindset to overcome those kinds of challenges. So you need to always be ready to find solutions, innovative solutions, maintaining an experimentation mindset, even when the company scales to foster those kinds of innovations. For example, also in Scalapay we went from 3 people to 230 in three years. Such an explosive growth, and at the beginning it was easy to keep this experimentation mindset because you were few people. Not very structured, flat structure, the information was running smoothly and when you scale you need to have the talent and the mindset to keep looking to the world with the scientific method, right? So testing and learning and uncovering unbiased solutions that probably you didn't even think could exist. Finding the right talents in the space, I think it's the key challenge for the industry.

How is Scalapay differentiating itself from its competitors in an already competitive market? How was it able to grow from zero given the presence of several large and successful firms in the same niche

Thank you. I think what we did well is to align our mission to the business model of the merchants. What do I mean by that? In the end, we are delivering value for our merchants, measuring that with the conversion rate and without disintermediating the merchants from the customers. So the value Scalapay brings is: yes, I can, with buy now pay later, raise key metrics like conversion rate, average order value, etcetera, but I'm also a referral tool for the merchants. I think we send like more than 1.5 million referrals per month to our merchants. So we play in two areas: in the checkout moment of the funnel where basically, aligned with our “Dolce Vita” narrative, you let the customer enjoy the pleasure of the purchase and you deliver a smooth shopping experience for them removing the bias of not enjoying the moment, In the end, you just let the client enjoy the pleasure of the purchase. With the referral part, we basically bring new customers to our merchants and we help them to retain and have multiple purchases from the existing customers. I think I saw statistics on some categories and on some merchants more than 70% of purchases were made by the Scalapay network. So that is why I think we are a network business because we have a community of digital shoppers (gen Z mostly) that are aligned with our target verticals which are fashion, luxury, and beauty cosmetics. This is very important to understand as a differentiating factor and we really focus on delivering also the best experience and the best product. If you look at Trustpilot we have a score of 4.8 with more than 20K reviews and 93% of these identify us as excellent. If you read the comments, you can also find: “I love paying with Scalapay”. It is not really common to see a BNPL player or a payment method in general. So we really did a good job in delivering the best product and the best narrative and alignment with our strategy and merchants.

What are some of the regulatory and legal challenges you have faced as a firm operating in Italy specifically and in the EU in general?

This is of course a relevant aspect for us because we want to be compliant from day zero and it's a top priority for us: when we started, there weren't so many clear rules on buy now pay later in general and around Europe. There were different models of compliance in different countries. So basically, every time we launched the new country, we had to adapt to the local regulations. This, of course, entails a lot of analysis from our legal and operation team. Also working with local consultants to understand how we could operate in a compliant way in each of the markets we launched. So that was, of course, a challenge, you always needed to adapt your model according to the regulatory environment that you were launching. Recently at the beginning of March 2023, we had approval from the Bank of Italy to finalize the acquisition of an Italian payment institute called Cabel IP, which allowed us to get a payment license which means basically expanding in Europe with a homogeneous model. So with the homogeneous legal setup without intermediaries and delivering new products, that is going to be key for the future and for the expansion of Scalapay because we can finally integrate with every payment system provider (PSPs) so we can unlock new deals and new business. We have a list of deals that were blocked because they were working with a specific payment system provider and now with this payment license, we can integrate with all of them. So if I have to synthesize now, we can expand with the homogeneous model. We can have a legal setup without intermediaries, and we can deliver new products. A key milestone for the expansion.

What are current trends that will help Scalapay expand its business?

Well, I think the main one is that in Europe, BNPL still has a low penetration in the market. So there is a lot of opportunity because e-commerce is expanding at a very fast rate in Europe. Buy now pay later is still very underpenetrated in Italy. So it's really a huge opportunity to expand. If I have to name other macro trends that I see, I think that probably regulation will evolve and set up a level playing field for the industry. So we will see some news about homogeneous regulation in Europe. I think that probably there is going to be a consolidation at the M&A level because the market right now is very fragmented and businesses will look at opportunities to have economies of scale, improve margins and deliver new products. And we are going to see partnerships with incumbents: traditional players will partner with BNPL firms, to have synergies and a win-win situation on the market.

What would be the state of the industry if traditional banks were to enter the BNPL industry with their own BNPL schemes per se, not per se, with collaborations with existing BNPL firms? What would it mean for scalloping and other firms within the industry?

I mean, I think that smart banks will partner up with little startups because of focus. BNPL startups are focused on the needs of the merchant. They can co-innovate with them and they have the capability to build superior tech products at speed. The two sides of the network, as I said so, traditional banks can for sure launch their own BNPL product. It is to be proven if they are going to be successful in the execution phase, right? Because it is not their core business to deliver that kind of experience. So for Scalapay and other BNPL players there would be more competition. If that happens, we just need to see if it's going to work. A partnership could be a win-win deal, instead of having an incumbent launching a new product from scratch.

We are all students of economics, management, finance, and computer science. What would you suggest to us if we want to work in this industry? What are some of the skills that we would need to develop for the BNPL industry?

Well, let me say three things. Buy now pay later as you said is a relatively new trend. So you probably need the entrepreneurial mindset, right? So whether you plan to start your own business or work for a startup in an innovative space, you need to develop an entrepreneurial mindset, which can be a valuable asset in the future of work. To be specific, skills like creativity, risk-taking, and resilience. If I have to summarize in one sentence, it is “making things happen”. Understand what can really have an impact on the business and retro engineer a plan to make things happen, to interact with external internal stakeholders, etcetera. This is the first piece of advice. The second is in the age of generative AI, to stay relevant, and this is probably general advice, not just for the BNPL space, you need to develop critical thinking and problem-solving skills. So with automation taking over many manual error-repetitive jobs, it is crucial to develop skills that robots cannot replicate. Developing critical thinking and problem-solving skills can help students navigate complex problems and come up with innovative solutions. So this is the second piece of advice and the third one is cultivating a growth mindset. Embracing lifelong learning, keep working on upskill and reskill to stay up to date with the rapidly evolving job market. Also BNPL is very fast evolving and you always need to keep up with the new regulation, new payment methods, new APIs, and new products that can be launched and you need to be open to new ideas. Taking on new challenges and persisting in the face of setbacks, is the third piece of advice that I can give and I think it's one of the most important.


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