The rise of digitalization and tech-savvy shoppers have paved the way for the emergence of Buy Now Pay Later (BNPL) in the credit and retail industry. This fast-growing online payment method is anticipated to be worth $USD 3.98 trillion by 2030. Companies such as Affirm, Afterpay, and Klarna are dominating the market, profiting from providing consumers with the gratification of instant purchases while suspending the agony of upfront payment. Moreover, merchants are drawn to BNPL as a valuable tool to shrink cart abandonment and boost sales. With such a profitable market and enormous potential for future growth, it’s time for banks to join the BNPL trend or be left behind in the sector.
Customers are embracing the BNPL trend
It’s no surprise that consumers are gradually opting for BNPL considering its more appealing features in comparison to credit cards:
- Personalized offers: Using highly sophisticated data analytics, BNPL can easily profile users and their spending patterns to provide offers that are specifically tailored to each customer’s needs. Offers can also be customized based on the transaction size. For instance, shoppers will get a monthly financing option with terms up to 12 months for purchase of $5,000 whereas a purchase of $300 will come with an offer of 3-month financing.
- Speedy credit decisions: Data-driven credit assessment allows instant approval for BNPL purchases at the point of sale. Thanks to the integration of these financial services into physical and online POS checkouts, consumers can now experience convenient and seamless one-click checkout processes.
- Zero fees or interest: Unlike credit cards, clients can pay off their purchases without incurring exorbitant interest rates and fees if payments are paid on time.
- No impact on credit score: Applying for installment payments via BNPL doesn’t have a direct effect on a consumer’s credit score (if payments are made on time), yet, it will damage their spendable limit if it is a credit card proposition.
A win for merchants
BNPL increases the likelihood of purchase for retailers, particularly for premium commodities. Merchants can also forge stronger bonds with customers by providing them with flexible payment options and maintaining the interaction even after the purchases. Additionally, merchants can propose third-party BNPL options to buyers without taking on any credit or fraud risk. Sellers receive full payment instantly at the checkout process, which is fairly tempting.
Regarding e-commerce merchants, BNPL offers additional flexibility with the option of ‘’try before you buy’’ to shoppers, where they can acquire the item and try it out before committing to any payments. This is enticing in industries like apparel where it is cumbersome for a client to make an online purchase only to discover when the product arrives that it doesn’t fit and they have to undergo a return and refund process.
It is found that BNPL can help merchants to increase sales by 30% and average order value by 41%, as per Klarna and Afterpay. This allows BNPL providers to charge higher transaction fees, ranging from 4% – 7% per transaction, as opposed to 1.5% – 3.5% for a credit card transaction.
Why banks should be worried?
As the popularity of BNPL continues to grow, banks can risk losing Millennial and Gen Z consumers over this alternative form of financing. With fixed payments and no interest charges, BNPL is an ideal payment option for young consumers who usually have restricted credit scores for traditional lending options. Even though its target audience is the younger generation with tight finances, BNPL’s user base is expanding to include a wider age range: approximately 40% of people aged 55+ have also deployed it, as per The Ascent.
The expansion of BNPL players into more traditional banking services is arguably the movement that worries banks the most. Paypal with its Pay in 4 option has recently raised the upper purchase limits available, permitting users to reimburse straight from their bank accounts, instead of credit cards. Several Fintechs have also offered faster, more flexible ‘’non-bank’’ lending platforms.
BNPL strategies for banks
Given the ongoing growth of BNPL, banks will have to decide whether or how they want to enter the market. Those who choose not to participate or delay too long in doing so might run the risk of missing out on this growing value pool and limiting access to younger generations with various credit demands. With that being said, here are a few business models banks can consider when joining the BNPL domain:
- Partner to generate differentiated solutions: By collaborating with BNPL players, banks can venture into innovative credit alternatives, such as short-term microloans, while maximizing their existing capabilities and capital. Last year, Bayclays US joined forces with fintech firm Amount to provide merchants with white-labelled POS buy now pay later financing service.
- Allow BNPL through credit cards at POS: Because of market pressure, some banks are already providing installment choices for their customers. Scotiabank has just launched Scotia SelectPay which allows purchasers to convert credit card repayments into fixed monthly installment payments. Other financial institutions in some Latin American countries like Brazil, Chile and Argentina have also enabled their customers to make BNPL purchases with their credit card balances.
- Obtain or develop their own platform: To address the BNPL threat head-on, the Commonwealth Bank of Australia (CBA) has launched their own product, StepPay, which charges smaller merchant fees. A quicker go-to-market alternative is to purchase an existing BNPL player. The American bank Truist Financial Corporation has obtained Service Finance Company to facilitate its entrance into POS financing.
- Innovate credit card offerings: Banks can improve existing credit card choices to entice consumers, like bundling to manage several installments within existing accounts. Citibank has started implementing this strategy, introducing City Flex Pay which entitles credit card users to make purchases and repay them in fixed monthly installments for a predetermined period.
Among these above-mentioned strategies, developing a BNPL platform is strongly recommend for banks. This will enable them to have full control over all available options on the solution and attract new consumers. Having a BNPL platform will also empower banks to flexibly adjust merchant fees to compete with other BNPL players.
Need help building your BNPL platform?
KMS Solutions is here to help. With over 12 years of experience in the tech industry, we have delivered multiple projects for numerous financial institutions including Asia Commercial Bank (ACB), MB Bank, Prudential Vietnam, ANZ New Zealand and many more. Contact us today for a free consultation.