As one of the industry’s hottest topics, buy now pay later (BNPL) routinely demonstrates its ability to bring consumers closer to the goods and services they desire, and merchants closer to the consumers they’re targeting; all while leaving ample room to surprise the industry every now and again.
In this guest-authored piece for The Fintech Times, Andy Cease, marketing manager of instant financial issuance solutions at the identities, payments and data protection solutions provider Entrust, offers an explanation as to why this form of paytech has enjoyed such remarkable success, how the industry’s biggest players are reacting to its rising popularity and why the arrival of contemporary technologies like open banking will change everything.
Digital technology is transforming how consumers, businesses and financial institutions make, receive and enable payments. From on-demand pay to digital wallets to cryptocurrency, the payment landscape is undergoing major disruption.
One such disruptor, BNPL, is poised for tremendous growth. BNPL is already one of the fastest growing alternative payment methods and according to Google search data, the term ‘buy now, pay later’ has quintupled in search volume from 2011 to 2021 in the US.
As a financial solutions marketing manager at Entrust, I work closely with major credit card providers like Visa and Mastercard as well as financial institutions like Navy Federal Credit Union, First Midwest Bank and Banco Estado. Part of my role is to stay on top of trends in the financial technology space, and I expect BNPL to continue to grow rapidly as the space matures and more players offer the service.
BNPL: A new spin on a timeless practice
BNPL is essentially a short-term loan. Customers pay an initial deposit for a good, followed by monthly or weekly instalment-based payments. There’s usually no interest for the consumer. Instead, the merchant pays the BNPL service provider a fee for the ability to offer BNPL. For example, Apple partners with Klarna to allow consumers to pay for purchases over four instalments.
The concept of BNPL has existed for as long as humans have traded goods and services — though by different names and in different forms.
In the days of bartering, one farmer might give another a seasonal harvest with the expectation that it would be ‘repaid’ later in the year (like winter-hardy brussels sprouts for the promise of summer-loving melons).
Another example is layaway, which was introduced during the Great Depression and is still offered by some retailers today. With layaway, a consumer pays a deposit on a good to ‘reserve’ it and only receives the item once the total balance is paid.
While these examples aren’t identical to today’s BNPL services, the principle is the same: offering goods without full payment based on an agreement that it will be repaid in time. Digital payments and e-commerce have helped BNPL flourish since all consumers need to do to use the service is check a box and digitally sign a service agreement contract.
BNPL is generally a good thing — for both merchants and consumers. It enables merchants to offer an easy-to-use, delayed payback option to consumers who may or may not have a credit card or the total funds immediately available.
As a result, BNPL helps increase order values and volumes for the company. For the consumer, it allows them to obtain an item when needed, without straining their finances — but it’s worth mentioning that failure to finish paying instalments could damage one’s credit score.
What’s on the horizon for BNPL?
Today, there are many BNPL services, ranging from those offered by third-party payment providers like Apple and PayPal to banks like JPMorgan Chase to dedicated BNPL service providers like Affirm, Afterpay and Klarna. In fact, American Express recently made headlines for partnering with Delta Airlines to offer a BNPL feature for Amex credit cardholders.
Despite the many players already offering BNPL, adoption has been limited for a few reasons. First, BNPL is not universally accessible to consumers. It’s only available at merchants who opt-in or for purchases that meet specific conditions (e.g., for a certain good type or price threshold).
Second, consumers are sceptical. They don’t trust just any service provider with their financial data and many BNPL leaders haven’t been around long enough to gain full customer trust.
Since most traditional financial entities — like banks, credit unions and credit cards — haven’t entered the space yet, it’s safe to assume there’s still an untapped market of consumers who want to use BNPL but are waiting for the right provider. Additionally, if credit or debit cards offered BNPL, it would be much easier to apply the service to in-person transactions.
Once credit card providers like Visa and other major financial institutions who are currently working on BNPL options unveil their offerings, I expect BNPL use to skyrocket. In fact, a recent study indicated that BNPL usage would increase among consumers if it was provided by their current financial institutions.
Finally, open banking could push more financial entities to offer BNPL. Every time a customer uses BNPL, they agree to a repayment contract that’s calculated on a person-by-person and transaction-by-transaction basis.
Open banking would allow customers to share their financial data with financial services and institutions. Access to this information could make BNPL contracts more accurate, meaning less risk for the institution offering the alternative payment method.
The time is right for BNPL
BNPL is on the rise and presents a major opportunity for banks and credit card providers to cultivate customer loyalty. Considering early indicators show Gen Z and millennials are especially interested in flexible payments, BNPL could be the key for financial institutions to retain these crucial customer demographics as they enter their peak earning and spending years.
But a word of warning: Institutions should ensure their BNPL offerings keep consumers’ digital information secure and don’t push low-income Americans into a cycle of debt. While some of the largest financial players have been slow to adopt the offering, we can expect to see more movement in the coming years as the space matures and open banking becomes more widely accepted.