Buy now, pay later (BNPL). It’s a message that appeals to customers, and it’s a growing trend that’s shaking up the credit industry. Fintechs have been moving aggressively to offer BNPL point-of-sale (POS) options for e-commerce purchases, and increasingly for purchases at brick-and-mortar shops. BNPL offers both convenience and personalization that focuses on customers’ needs.
There are various ways for banks to incorporate BNPL strategies into their business. Let’s look at how big an opportunity it is, why it’s growing so fast and what options are open to banks that want to move into this space.
How big is the opportunity?
Current trends suggest that banks have a significant opportunity in BNPL. If growth continues as projected, according to Insider Intelligence, the BNPL offering will account for an impressive $680 billion in transaction volumes worldwide in 2025. However, since it is still quite new, it‘s impossible to predict how severely BNPL might be affected by a major change in the economic landscape, such as a recession.
E-commerce has served as an initial proving ground for BNPL adoption, but fintechs are moving into in-store payments quickly. PayPal is leading this drive, offering BNPL in more than 600,000 physical stores. The adoption (and increasingly the expectation) of BNPL has been further accelerated by the growing number of companies joining e-commerce marketplaces and by traditional consumer goods companies selling directly to consumers.
62% of users think BNPL could replace their credit cards.
-The Ascent, 2021 survey data
The popularity of BNPL spans all age ranges. Although younger consumers are more likely to have used BNPL (over 60% for all age groups under 45, according to The Ascent), more than 40% of consumers in the 55+ age group have also used it.
As the adoption in BNPL grows, credit card volumes may continue to shrink. In 2020 alone, three of the largest banks in the United States reported a greater than 20% decline in year-over-year credit card purchase volumes, according to Payments Journal.
We may also see BNPL players filling a gap by managing cross-border risk profiling and creditworthiness across territories—an area that’s been a challenge for incumbents. People moving between geographies may use BNPL providers as an alternative to waiting until they have built a credit record in their new location.
Both customers and merchants have been quick to adopt BNPL, so let’s explore what makes it so appealing from their perspectives.
Why customers like BNPL
BNPL moves us closer to a seamless, connected commerce experience. From the customer’s perspective, these are some of the appealing features:
- Tailored offers: BNPL can create customized offers for each customer by using their data and history to predict their needs. Offers can also be tailored according to the transaction size. For example, a $5,000 treadmill purchase may attract an offer to pay the balance over 24 months, whereas a $200 pair of shoes might come with an offer to pay the total over three months. Personalizing offers based on credit history, preferred brands and type of purchase, combined with a strategy for the retailer or bank to increase the size of certain customers’ digital wallets, can also make BNPL a very interesting tool for enhancing loyalty among the most affluent customers.
- Instant credit decisions: Data-driven credit processes enable instant approval for BNPL purchases at the POS. The embedding of these financial services in physical and digital POS checkouts eliminates a significant pain point for consumers.
- No fees or interest: If payments are made on time, the customer can pay off their purchase without the high interest rates associated with credit cards, and without paying a fee. Although charges for late BNPL payments can be quite high, customers may not consider these at the time of purchase if they intend to pay on time.
- Decide when you buy: Financing options are presented at the exact moment the purchase decision is made. By reducing the price barrier, BNPL gives the customer more choice about when to buy the item.
- No impact on credit score: Requesting installment payments through BNPL does not have an immediate impact on a customer’s credit rating (if they pay on time), but it will affect their spendable limit if it is part of a credit card proposition.
In addition to these features, BNPL has added appeal in high interest/high inflation market conditions. Consumers can use BNPL for short-term and simplified financing without paying high interest rates and can make major purchases before the prices rise any further. Also, they can leave more of their money in interest-bearing investments or accounts for longer, since they do not have to pay the full price up front. On the other hand, if a significant economic downturn results from these conditions, the outlook for BNPL may suffer.
Why merchants like BNPL
BNPL gives merchants a better chance of making a sale, especially for big-ticket items. They also stand to create stronger relationships with their customers by offering them flexible payment options and extending the interaction beyond the moment when the purchase is made.
Merchants can offer third-party BNPL options to customers without assuming any credit or fraud risk. The merchant receives payment in full at the time of purchase, which is very appealing.
Merchants can also tie BNPL promotions to key shopping dates like Black Friday. This can give them an advantage over competitors that are selling similar items, and can help them to maximize their sales on those dates.
For e-commerce merchants, BNPL has provided more flexibility to offer “try before you buy” options to customers, where they can receive the product and try it out before making any payments. This is appealing in sectors like fashion, where it is inconvenient for a customer to purchase and pay online, then find out when the product arrives that it doesn’t fit and they need to initiate a return and refund.
Almost half of BNPL purchases (48%) were for electronics, and another 40% were for clothing and fashion items.
-The Ascent, 2021 survey data
|Merchants that use BNPL are 30% more likely to close the sale than those that don’t.|
|Merchants’ average order value increased by 41% after introducing BNPL.|
|66% of retailers saw an improvement in customer satisfaction after introducing BNPL.|
|Without BNPL, 44% of customers would have abandoned the sale.|
BNPL strategies for banks
Banks that want to take advantage of the opportunity of BNPL are currently trying a few different approaches. Some are offering one-to-one models with specific merchants (e.g., TD Bank is providing BNPL for the fitness equipment manufacturer NordicTrack), while others are creating models that allow them to act in the background behind BNPL propositions (e.g., Westpac has a BaaS arrangement with Afterpay) or are leveraging other players to create differentiated offers (e.g., Royal Bank of Canada partnered with digital payments company Bread to create its PayPlan offering).
There are several ways that banks can increase their chances of success in the BNPL domain:
- Be purpose-driven: Banks can play the role of “responsible financer” very effectively. They can determine what each customer can afford, educate them, and help them avoid overspending by managing their overall limit and exposure. Regulators’ control over fintechs that provide BNPL will offer an opportunity for banks to differentiate themselves.
- Apply a holistic approach: Banks can manage the merchant acquirer and card issuer businesses holistically, which will enable them to run connected campaigns and manage a combined P&L for the two businesses. BNPL will likely increase the spending and lending volumes for retail banking, and for business banking it usually triggers additional services around cash management.
- Boost loyalty and personalization: Banks can proactively create offers and manage real-time personalization of both in-store and e-commerce purchases. When there are multiple offers at the checkout, customers will choose the most personalized and relevant option. Banks will be forced to be contextual and relevant at the moment of purchase.
BNPL indirectly results in a virtual merchant marketplace forming around the BNPL provider. This creates a certain level of customer attraction, which triggers merchants’ loyalty to the BNPL provider.
In my upcoming post, I’ll be taking a closer look at what’s gone well so far with BNPL, and what concerns both providers and customers need to keep an eye on.