Buy Now Pay Later: Beyond Easy Credit

Digital transformation has changed the way consumers interact with products and services and challenged companies to rethink their working models, including in the traditional banking sector. With the expansion of e-commerce services, there is an urgent need for traditional banks to develop better and more customer-centric solutions to create an innovative digital experience.  

Buy Now Pay Later (BNPL) – a service that allows customers to make purchases and pay for them later (offering new credit alternatives) – is a great example of how rapidly the banking industry is evolving. The biggest challenge for traditional banks is the ability to keep up with these changes to avoid losing customers, especially among millennials and the new generation of consumers, who prefer comfortable and digital solutions. 

The BNPL model is an intuitive and very appealing process to consumers. It facilitates payments because the customer can split them and does not require credit requests, such as credit cards, or other bureaucracies. On the other hand, they are a cheaper alternative. For retailers and suppliers, it’s even simpler: customers spend more and keep buying.

We can say that the COVID-19 pandemic positively influenced the growth of BNPL. As companies struggled to increase sales during the economic crisis and tried to offer new solutions to stimulate digital consumption, the Buy Now Pay Later model was used to quickly enable brand alliances within markets (as Klarna has in its app), but especially when offering lower APRs than regular credit cards.

With BNPL, we’ve seen an increase in the conversion rate, but also a higher spend per purchase. Research shows that BNPL schemes are growing at a rate of 39% annually in the UK and will double their market influence by 2023. Statistics also reveal that 71% of consumers have purchased more products online since the start of the pandemic. 

A revolution in the customer’s journey 

BNPL gives customers the opportunity to continue shopping, despite having credit at the time of purchase, so this solution has a great influence on the decision-making process, it already gives customers a time window that they did not have before. This possibility may even encourage the customer to buy more, as they will only need to pay several weeks or months later. Additionally, BNPL fintechs are equipped with a highly effective digital marketing strategy and customize the entire customer experience, offering advantages such as wishlists, alerts, discounts, among others. 

BNPL truly represents a revolution for the customer journey and can go beyond easy credit. This model also offers a platform for consumer spending that is fairer than credit cards. According to Forbes, consumers will make around €882 billion in retail purchases using BNPL programs this year. The BNPL has a very well-defined dual strategy, as it can capture, in the open market, the more experienced and younger segments that nowadays do not want to have a credit card and an older population that, through the BNPL and its methods flexible payment options, you can easily pay for your purchases later, without the need for credit history. 

The need for regulation  

But there is also a disadvantage: the fact that this model is not yet regulated encourages an increase in consumer indebtedness, mainly due to any lack of clarity that may exist about the conditions associated with the products. For short-term creditors, for example, the biggest disadvantage is that they cannot assess the size of the debt that consumers incur. 

Regulated banks are also concerned about how the BNPL could divert revenue from other sources, such as credit cards. Critics of this solution believe that unregulated financial models encourage unsustainable spending by people, who buy far more than they can afford. Experts also note that these services do not give buyers enough time to familiarize themselves with the process, which can increase the number of debtors. 

A Goodbody financial analyst mentioned that the regulators’ approach will be a critical factor in the market’s growth. An unregulated financial system is more likely to see its end because it does not provide sufficient guarantees to suppliers, consumers, and other institutions. Most importantly, fair regulation will allow several million people to have access to a comfortable method of payment – ​​whether through e-commerce or in-store – without the need for a ‘stuffed’ bank account or card. At LATAM, for example, there are services – such as those from Kueski Pay or Wipei – that do not require this. 

Banks are now aware of this new revenue stream created by the BNPL and, if they are interested enough, they could win a great sale product that will act as a complement to the current offer.  

Miguel Pontes, Head of Business Strategy, point of view about the challenges and opportunities that new payment models and alternatives to credit bring to the customer’s journey, published on Sapo Tek.