An increasing number of retailers are offering their customers the option of purchasing products and paying later in instalments. Regarded as the new standard of lending category, the buy now pay later or BNPL is a real competition to the incumbent credit card industry.
According to estimates, the global BNPL industry is expected to grow by 10-15 times, exceeding $1 trillion in the annual gross volume of goods.
So why is BNPL the next big thing in finance? Let’s find out.
What is Buy Now Pay Later?
Buy-now-pay-later is a credit option available at the point of sale or online check-out, allowing consumers to purchase a product immediately and pay for it later in instalments.
This option gives online shoppers the ability to spread the cost over several weeks or months, often at 0% interest, instead of solely relying on a credit or debit card. BNPL is a new twist on the old idea of retailers offering instalment plans on big purchases for decades.
Companies can create autonomous payment ecosystems by working with a network of retailers.
Who is Offering BNPL?
The flexibility to divide any amount — from a $2 chocolate bar to a $1500 laptop — into smaller instalments allows consumers to shop without feeling burdened.
While consumers should never spend over their means, having the option of payment plans is helpful when they need to buy something vital.
BNPL payment models are often offered by:
- Retailers selling high-value goods like luxury items.
- Retailers selling low-value goods that seek to reach more customers and increase their average cart size.
- eCommerce platforms to close sales faster and tap credit-stricken markets.
- Travel-tech platforms
- Ed-tech platforms
- Banks and lenders
BNPL service providers are banks (Axis, ICICI, IndusInd among others) and fintech like Simpl, RazorPay, AfterPay, Affirm, Klarna, Amazon Pay, among others.
Types of BNPL Solutions
There are BNPL systems for e-stores and point-of-sale (POS) systems. In addition, the BNPL provider can have a dedicated application for customers to sign up for an account to track repayments easily.
In addition, these providers allow merchants to be paid up-front. Let’s go over the different configurations in buy now, pay later:
BNPL options can be integrated into your online store’s payment methods. Online customers can opt for this payment method, choose a repayment plan and complete the transaction.
Also called point-of-sale credit, physical stores can integrate a POS system with the buy now pay later option added to their payment methods. The merchant can then offer it at the checkout, usually via a QR code or a payment link.
BNPL distribution channels can include merchant platforms, merchant checkout, multi-lender networks like Visa, bank credit cards, and white-label providers such as customised store credit cards.
How Is BNPL Disrupting Traditional Lending?
With the acceleration of purchases made through the buy now pay later models, these solutions can replace good-old credit cards sans the interest, radically altering the way consumers pay for things.
Most of the models would be built on top of your existing financing with no credit checks or switching costs in the coming years. And the upside remains the same- getting the goods upfront.
Notably, buy now pay later providers spread out the money for consumer purchases so that retailers get paid in full. They make the majority of their money by way of merchant fees on the initial transaction. With their longer point-of-sale loans, these providers could shine through and translate to higher sales for retailers and a better shopping experience for consumers. This is a paradigm shift in lending.
Here are some of the benefits of BNPL:
With buy-now-pay-later plans, you can offer interest-free offers and pay off your balance on time to consumers. Most of the attractiveness of BNPL solutions is relatively intuitive, which resonates with consumers where the repayment conditions are taken care of from the beginning.
2. Appealing to Specific Demographics
Millennials and Gen Z are the demographic groups and growing consumers who prefer seamless digital payments and instant gratification. BNPL presents itself as an appealing and convenient option with real-time approvals of purchases and the allure of virtual credit options.
3. Fast and Convenient
The swiftness and convenience of BNPL solutions are undeniable. Most payment options are built-in with online retailers and are hassle-free with the immediacy of purchasing and long-term budgeting needs.
4. Favourable Borrowing Terms
Buy now pay later schemes are great for people with little credit or short credit history, massive purchases.
5. Increase in Sales
BNPL applications encourage repeat purchases, which helps translate higher sales for retailers. It also helps close deals that would have otherwise gone unclosed owing to a lack of credit options at the time of purchase.
With the option of splitting the cost to equal instalments over a few weeks or months, consumers also avail simplified checkout processes.
From the perspective of merchant checkout design, buy now pay later payment methods are easy to integrate with a BNPL provider or through their payment service providers (PSPs).
Can BNPL Transactions Impact Credit Score?
BNPL is a form of credit, and thereby it can affect your credit rating. However, you can use the feature without any inconvenience by making your repayments on time, and your credit score will remain unimpacted.
Upon missing a payment, the same might get recorded on your credit report and potentially lower your credit score and affect the approval of your loan application.
Buy Now Pay Later in a Post-Pandemic World
The COVID-19 pandemic accelerated long-foreseen changes in consumer behaviour in the retail and eCommerce space. As a result, there has been a significant rise in online marketplaces over the last year, leading to large customer bases and fast launch times.
Moreover, in a time of economic instability and record low employment, fears of debt and inclination to money-saving alternatives drove consumer interest towards buying now, pay later solutions.
Unlike the traditional layaway payment plans, buy now pay later is a consumer-friendly payment method with omnichannel access at retailer websites.
In a post-COVID world, BNPL models will benefit key payments players like fintech offering BNPL services, payment processors, payment networks, retailers, and consumers. In addition, the models can extend beyond the retail vertical to sectors like travel and aviation.