BPNL – Buy Now Pay Later – has revolutionized the online retail and consumer credit market. Swedish company Klarna is perhaps the most well-known company in this space and is now the second most valuable fintech startup in the world (after Stripe) after it recently announced a $45.6bn valuation after its latest fundraise. What do you know about BNPL? Read on to learn more.
Over the past few years, BNPL has gone from a niche payment method to one of the hottest trends in payments. According to research and interviews conducted as a part of our article Latest Ecommerce Trends for Holiday Season 2022, this is the year that BNPL will become a mainstream payment method.
BPNL is expected to reach $680 billion in transaction volume worldwide by 2025. The need to balance oversight with consumer protection will, however, lead to regulations, but on the other hand will the emergence of new innovative solutions and business models take place. As competition heats up and new players enter the market, banks will naturally get in on the action to protect their market share.
In the UK, the use of BNPL products nearly quadrupled in 2020 and is now at £2.7 billion, with 5 million people using these products since the start of the pandemic. The rise of BPNLs has left traditional providers, banks, online merchants, payment providers and regulators alike all around the world scrambling to keep up.
Installment payment plans are nothing new; retailers like furniture and electronics stores have allowed customers to pay off large purchases in installments for decades. Buy now, pay later brings the concept into the digital age by allowing any retailer to offer installment payments for any product, no matter how small, both online and in-store.
The BPNL-model is essentially based on two things: being able to split payments in equal parts and the ability to pay later. So, the model is easy to replicate across industries and BPNL companies are differentiating themselves by entering new markets. All kinds of fintech start-ups are jumping on the bandwagon – be it travel, insurance, healthcare, B2B trading, or even blockchain and crypto currency.
The benefits of BNPL to the consumer are well known. Paying for goods in installments with no interest charges gives them much more flexibility than a traditional credit card. In turn, e-commerce providers are able to keep their customers happy with more payment options at the checkout. Another big player in this space, Clearpay, has said that in average, firms using its service experience a 30% boost in the value of orders. Having BNPL options on a website has become a must for retailers in order to maximize sales.
Klarna partnered with Expedia Group to allow their customers to “travel now, pay later” and recently acquired Inspirock, an online trip planner which uses artificial intelligence (AI) to recommend trips based on a person’s interests. Also, Affirm has partnered with American Airlines to allow passengers to “fly now, pay later”.
When browsing products online, customers may see the BNPL installment price on the product page, which helps make the product feel more affordable. Consumers can also choose BNPL at checkout. In addition, some issuers and financial institutions are now offering buy now, pay later so that cardholders can pay for specific transactions in installments, allowing them to better manage cash flow and potentially avoid late fees.
Not unexpectedly, this has given criticism and brought BNPLs into the view of regulators. Critics argue that many of its Millennial and Gen-Z userbases are taking on debt that they cannot service and that the lure of interest-free installments and no-hidden fees lead to over-spending. It’s also been suggested that BNPL users aren’t always aware that they are entering into credit agreements that could result in late payment fees. Another consumer issue highlights the requirement for consumer to first contact the merchant to get credit for a return or refund, unlike credit-card issuers, which typically stop payments when a transaction is disputed.
As the BNPL model expands into other industries, insuretech company Ascend is expanding its BNPL commercial insurance offering using payments APIs that automate end-to-end insurance payments. In healthcare, US fintech start-up Walnut partners with healthcare providers to allow patients to pay by instalments.
According to Juniper Research, BNPL payments are expected to account for nearly a quarter of all global ecommerce transactions by 2026, up from just 9% in 2021. The payment type skews younger, with eMarketer forecasting 44% of Gen Z and 37% of millennials making a BNPL payment in 2022, compared to 23% of Gen X and 9.4% of baby boomers. It’s a payment type that attracts all audiences, particularly Gen Z and millennials.
Earlier this year, the UK’s Financial Conduct Authority published a review that concluded that regulation was essential to protect users of BNPL products and make the market more sustainable. The review came up with 26 recommendations, including affordability checks, provision of debt advice, making more alternatives to high-cost credit available and ensuring that regulation does not focus simply on affordability but on conduct across the lifetime of the product. Meanwhile, Australian regulators are reviewing rules for BNPLs, and experts have also predicted greater scrutiny in the US under the Biden administration.
Banks are seeing a share of their credit card and consumer loan revenue cannibalized by BNPL lenders. The time is right for banks to enter the BNPL market but having the right market entry strategy and business model is key to succeeding. Being a regulated industry, banks are experienced in regulatory compliance and credit underwriting and have the data and customer base to compete in this space. Banks are also well placed to determine affordability and can personalize BNPL offers based on a customer’s risk profile using their financial data. But they will have to act fast or risk missing the boat.
According to a recent Visa survey, Canadian consumers increased their adoption of installment payments by 30% within the previous 12 months, with installment payments in Canada estimated to account for $50 billion annually.
While awaiting the form of any upcoming regulation, it’s clear that some of the suggestions from the UK’s Wooland review are eminently sensible. BPNL has brought simple, flexible and instant purchasing power to the consumer, but it can’t be at the expense of responsible lending. As UK MPs were right to point out, no one wants to see another Wonga. Regulatory scrutiny of the sector is necessary to ensure that all customers are treated fairly by raising standards in responsible lending.
As BNPL players scale and increase engagement, we can expect to see super apps offering a combination of shopping, financing, payments, and banking products. Klarna, Affirm and PayPal have already joined the fray and launched their own super apps. Klarna’s super app transforms the BNPL giant into an end-to-end shopping hub, enabling shoppers to use their instalment service at any online retailer, whether they are partnered with Klarna or not.
PayPal’s super app offers an all-in-one financial and shopping solution. PayPal CEO Dan Schulman said the company wanted to provide customers with a “customized and unique shopping, financial services, and payments experience”.
According to Bloomberg, China could see BNPL account for $58 billion in sales within the next three years.
I believe, however, that any regulation has to be light touch and cannot stifle the progress of BNPLs. After the pandemic, countries all over the world must ease the burden of red tape on the industry in order to stay competitive.
That being said, BNPL providers should develop an Open Banking strategy and start building their platforms, partnering with third-party providers or making acquisitions in preparation for regulation. Open Banking will transform the way credit risk and affordability checks are done and enable BNPL lenders to make more accurate affordability and lending decisions.
In December last year, the Consumer Financial Protection Bureau (CFPB) issued a series of orders to five major BNPL providers to collect information about the risks and benefits of their solution. The CFPB is concerned about the potential for consumers to accumulate debt too quickly.
Allowing innovation in finance would also help BNPLs to grab business from traditional credit cards. BNPL helped UK consumers to save over £75 million in interest payments in 2020 instead of credit cards. As more consumers choose BNPL, the potential savings on interest payments will only increase.
Buy Now Pay Later is expanding across industries and competing with banks for revenue share, and the time is ripe for disruption. Banks and larger competitors, such as global merchants, entering the BNPL arena must carefully consider their market strategy and build compelling and scalable business models to stay competitive.
Regulators around the globe are similarly weighing their options. PYMNTS notes that the UK is currently exploring whether or not the exemption in the Consumer Credit Act for delayed payment of goods and services applies to BNPL. The European Commission and Australia may also seek to regulate BNPL within the next year.
Collectively, the industry has a duty to ensure that it provides consumers with the necessary information to make the right purchasing choices whilst also protecting them should anything go awry.
The future of retail is upon us, and we have to capitalize on the opportunity to make Scandinavia a global hub for innovation while also establishing a new customer credit environment that is fairer, more transparent and has the best interest of the consumer at its core.
What Do You Know About BNPL? written by Tor Kjolberg