BNPL portfolio classification and expected credit losses

BNPL receivables are financial assets held to collect contractual cash flows and must be classified at amortized cost (typically) and subjected to a three-stage expected credit loss model reflecting significant increases in credit risk, which is a new discipline for entities that previously only processed payments; under-provisioning for a fast-growing, short-tenor consumer credit book can materially overstate assets and profit just as delinquency emerges.

Does the entity bear the credit risk of non-payment on the BNPL book, or is it transferred to a funding partner/bank? How is 'significant increase in credit risk' defined and tracked for a short, weekly/bi-weekly installment product (given the standard 30-days-past-due presumption may be too slow)? Is a back-tested three-stage ECL model with forward-looking macroeconomic overlays in place and recalibrated as the book matures?

1) Confirm the business model (held to collect contractual cash flows) and SPPI test to classify BNPL receivables at amortized cost. 2) Recognize the receivable at disbursement/purchase date, initially at fair value (normally transaction price). 3) Build staging criteria: define what constitutes a 'significant increase in credit risk' for a short-tenor product (e.g., specific days-past-due thresholds, behavioral score deterioration) since the standard 30-days-past-due rebuttable presumption may be too slow for weekly/bi-weekly installment products. 4) Apply 12-month ECL to Stage 1, lifetime ECL to Stage 2 and Stage 3. 5) Incorporate forward-looking macroeconomic overlays relevant to KSA/GCC consumer credit (e.g., unemployment, inflation, consumer spending indices). 6) Recalibrate the model regularly as the book matures and actual loss data accumulates; do not freeze assumptions from origination.

Apply a three-stage ECL model: 12-month ECL for Stage 1 (no significant increase in credit risk), lifetime ECL for Stage 2 (significant increase) and Stage 3 (credit-impaired); incorporate forward-looking macroeconomic factors relevant to KSA/GCC consumer credit; measure Stage 3 exposures using a higher, individually or collectively assessed loss rate reflecting reduced recovery expectations; subsequently measure the receivable at amortized cost using the effective interest method if a financing component exists.

Disclose: the ECL methodology and staging criteria specific to the BNPL product; a reconciliation of the loss allowance by stage (opening, transfers between stages, new originations, write-offs, closing); credit risk concentration by product/tenor/merchant category; the definition used for 'significant increase in credit risk' and default; and separation of BNPL receivables from settlement and trade receivables.

• Applying only an incurred-loss or flat provisioning approach instead of a forward-looking three-stage model
• failing to build sufficient historical loss data before scaling originations
• not distinguishing platform-funded exposure from risk transferred to a partner bank
• using the generic 30-days-past-due presumption without testing whether it is appropriate for short, weekly installment tenors
• ignoring merchant-category risk differences (e.g., electronics versus groceries) within a single blended loss rate.