The Promising Future of Buy Now Pay Later
(Written by Mumtaz Afrin): - "Buy now, pay later" (BNPL) payment plans are not a brand-new idea. Although the Great Depression saw the rise of layaway and instalment plans, the modern digital payment solution has gained popularity recently as a result of an increase in internet purchasing and a rush of new service providers. Customers who use BNPL payment plans can pay for their orders in a series of interest-free payments.
Anisha Kothapa, a senior analyst at CB Insights, discussed how the expansion of BNPL providers is influencing credit card issuers in a manner similar to how digital banking affected branches during a session at the annual Future of Fintech conference, which took place on October 5 to October 6. BNPL firms are snatching business from traditional financial providers and improving customer satisfaction by giving consumers a more effective and affordable option.
BNPL Is Cheaper
According to a McKinsey study, mature BNPL providers invest roughly 70% less in client acquisition than a private-label credit card provider does. According to CB Insights, the BNPL industry has expanded at an annualised pace of 58% since 2015. This is because companies like Afterpay and Klarna are able to recruit clients more quickly and effectively than traditional payment methods.
Additionally, BNPL service providers are forming alliances with well-known, big-box stores and thereby gaining access to their enormous client base of consumers. Examples of exclusive collaborations that benefit both the BNPL provider and retailer include Target and Sezzle, Macy's and Klarna, and Amazon and Affirm. Customers enjoy a smooth and transparent checkout process, while merchants get more money from clients who favour the payment option.
BNPL Is More Efficient And Reaches More People
Kothapa claims that BNPL providers employ alternative data, AI, and machine learning to more swiftly and accurately evaluate a customer's credit. For instance, Affirm employs more than 200 customer data points to control risk, and its seven million active loans help to enhance its artificial intelligence algorithm. Banks do have transaction data, but BNPL suppliers have a more complete set of data, such as stock holding data, she claimed.
Younger generations, such as Millennials and Gen Z, who prefer credit card alternatives and use BNPL solutions to make purchases that would otherwise not fit their budget, are being targeted by BNPL suppliers. Additionally, this group may experience difficulties like being denied a credit card. The sector will continue to profit from the aforementioned generations' growing percentage of retail spending, which, according to Afterpay, will increase from 30% to 50% by the year 2030.
How Does BNPL Work?
Customers often have the choice at checkout to receive their product immediately but pay for it in full after 30 days or over the course of several smaller instalments.
They commonly pay in three or four evenly spaced instalments, each directly deducted from their credit or debit card. In either case, as long as they pay on time, there are no additional fees or interest to pay.
Participating merchants pay the service a fixed fee per transaction in addition to a 2-6% commission.
Buy Now, Pay Later Payment Options
Though specifics vary by nation, most BNPL services give users three fundamental choices:
After 30 days, Pay Later in full.
Divide later payments into three or four equal, interest-free payments.
Finance It by dividing the price of larger purchases into up to 36 monthly payments. Interest fees may be incurred.
The Buy Now, Pay Later checkout experience
Think about the BNPL experience from the standpoint of the client. They select checkout after finding an item they want and adding it to their basket. All is well thus far.
But this is when things start to get interesting.
They will have access to alternatives like Pay with Sezzle and Pay with Klarna in addition to more conventional payment methods like credit/debit cards and PayPal.
Customers are given the opportunity to buy now and pay later right next to the sections where they enter their credit card information, giving them more flexibility with their purchases thanks to a variety of flexible payment alternatives.
What’s next?
According to Kothapa, "buy now, pay later companies will continue to expand and encroach on in-person buying." Customers can already get in-store BNPL solutions from businesses like Klarna. Another possibility for providers is to broaden beyond business-to-business transactions, which frequently have greater average order values and order frequency.
In addition, BNPL providers will diversify their offerings. According to CB Insights, BNPL businesses will use loyalty programmes, high-yield savings accounts, and debit cards to innovate and draw in new clients. Without opposition from established banking providers, this won't happen. Financial industry leaders like PayPal already give choices for split payment plans, and in 2021, Goldman Sachs purchased BNPL provider GreenSky. Despite making up only a small portion of worldwide e-commerce expenditure (2.1% in 2020, according to Worldpay), BNPL payments are expected to grow in importance and feature set over the next several years.