Having Processed £3bn Worth of Applications, Deko Have Partnered With Zip, the BNPL Service
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Zafin: Buy Now, Pay Later (BNPL) – Consumer Pitfalls and Perks

The uptake of BNPL has been nothing short of incredible. Over one in four people in the UK believe without it, they wouldn’t be able to afford Christmas, and as of July 2021, over 50% of Americans have too. Corporations offering a BNPL service have flourished whilst those who haven’t are lagging behind. However, whilst there are many perks to the new payment service, customers must be wary that they do not fall into the trap of believing they can afford anything and everything. 

Gabriel Leiva von Bovet is the Executive Vice President of Sales at Zafin, a SaaS cloud-native product and pricing solution that empowers banks of all sizes to center their customers, grow relationships and drive revenues. 

Leiva von Bovet examines the pros and cons for customers using the payment service, which has been around for a while, and how large banks can adapt their systems to accommodate for consumer demands as BNPL competes with credit cards:

Gabriel Leiva von Bovet, Executive Vice President, Sales at Zafin
Gabriel Leiva von Bovet, Executive Vice President, Sales at Zafin

Buy Now, Pay Later (BNPL) programs are on the rise around the world. Providers like Affirm, AfterPay and Klarna have entered the growing market, adding options for consumers looking to buy what they want when they want without incurring more credit card debt. In the US, BNPL is replacing traditional programs such as Walmart’s layaway. Its explosive growth has reached upwards of $100billion in revenue, and that trend is only expected to grow across the globe as companies realise the value of attracting customers looking for payment plans.

Although financing arrangements for purchases have existed for a long time, online purchasing and elaborated apps have given it a new life, particularly for small purchases with short-term financing (mostly a few weeks). Fintechs have taken the lead and have pulled significant revenues away from banks as they have been slow to react. McKinsey estimates that BNPL fintech companies have absorbed nearly $10billion in annual revenue from banks.

BNPL offers consumers the chance to buy products at the point-of-sale, and instead of paying one lump sum upfront, consumers put as little as 25% down, and the remainder is paid off over a predefined number of instalments. Some additional characteristics of BNPL include:

  • Zero-interest because the merchant pays the BNPL provider
  • Easier to get approved for BNPL compared to traditional credit cards or lines of credit
  • BNPL typically doesn’t affect credit score unless there are missed or late payments

Consumers need to be aware of both the benefits and the pitfalls of using such financing options. And banks need to get up to speed with this trend to provide better and smoother transactions for their customers.

Benefits to Consumers

BNPL’s growth speaks volumes to how much consumers value it. Compared to traditional payment methods, it offers flexibility and frictionless transactions that consumers like. Shoppers can get quick approval of a payment plan right at check out, which makes for a seamless transaction compared to searching for other financing options or paperwork.

For people with lower budgets or who cannot buy pricier items in one lump sum, BNPL offers access to financing for consumers who might not typically qualify for a credit card or other financing but would still like to enjoy the advantage of spreading out their purchase into payments. By also offering little or no interest, it’s a more attractive option than using a credit card whose rates typically inflate the cost paid for a good.

Pitfalls for Consumers

While BNPL options are easy to use and often offer more flexibility for consumers, it has its downsides, just like other payment financing methods. And if consumers don’t read the terms and conditions correctly, it could be costly and damaging to their financial wellness in the long run.

With BNPL still growing in an unregulated market, there are fears among the traditional financial powers that this is building bad financial habits. Due to its ease of use, shoppers might take on more debt than they can afford, either not budgeting correctly over the term of the repayment plan or not paying for their purchase according to the plan.

When it comes to making payments, some BNPL plans might automatically charge the consumer’s debit card or credit card when the payment is due. So, if a payment is missed due to a lack of funds, the lender can charge late fees and report it to credit bureaus. On the other hand, when there isn’t an automatic payment feature, payments can be hard to track resulting in missed payments. And, while missed payments damage a person’s credit scores, healthy financial habits through BNPL are not designed to build good credit history.

Finally, due to consumers having to deal with two companies at the point of sale (the retailer and the lender), there isn’t a lot of consumer protection when it comes to returning items or forgiveness on late payments.

Impact of BNPL on Banks

BNPL isn’t just impacting consumers. It also forces banks and credit unions to change how they operate, as it has thrown a wrench into their traditional revenue streams. While credit cards generate money for banks through interest rates and late fees, BNPL offers a way for consumers to bypass those fees. However, those fees are a fraction of the revenue banks generate. But as BNPL continues to gain traction, it will be interesting to follow the true impact over an extended period of time.

Banks are also fearful of losing direct contact with their customers. The emergence of BNPL services could lead to further disintermediation in the payments space, particularly with younger demographics who can be wary of credit card debt and traditional banks.

Fintechs have emerged in the space as a guiding light for banks looking to keep up. Banks are helping their clients maintain financial health by monitoring BNPL transactions, which are identified as the first payment, and creating a consolidated view of their BPNL debt. This enables banks to regain the credit relationship by leveraging the monitoring function that can trigger offers to consumers to substitute outstanding BNPL debt with longer-term financing.

While BNPL’s emergence in finance has been a disruption, it won’t completely overhaul the sector – especially as banks quickly learn to leverage the financing. Instead, BNPL offers benefits to consumers who might not receive traditional financing options for purchases – but buyer beware, there are also risks.

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