Buy Now, Pay Later: combining ecommerce with finance

A survey by PYMNTS.com and PayPal, “Buy Now, Pay Later: Millennials and the Changing Dynamics of Online Credit,” based on two surveys of nearly 15,000 US consumers between March and September of last year, showed that the adoption of BNPL increased significantly in 2020.

In the 4th episode of UR podcast, we talk to economist Mercedes Comas to learn more.

What are these BNPL services? What characteristics do they have? What benefits and risks can they entail?

As the name implies, they are services that allow buyers to buy something, most of the time online, to pay for it later in full or in installments, without interest for short-term financing.

The most important difference from traditional installment payment plans used in retail is that the order is shipped on a regular basis, right after it is placed, and the sellers receive the full payment in advance, less a commission charged by the supplier of BNPL. This commission can vary between 2% and 8%, depending on the BNPL solution and the merchant, the type of item and the price.

Currently, BNPL is the fastest growing form of payment in the developed world.

Who are in this segment? Who are the big players in the market?

The best known companies that provide this service are Klarna, Clearpay (called Afterpay in Australia and New Zealand), Affirm, LayBuy and Quadpay, but giants such as PayPal, Citibank, American Express and Visa have recently responded to the challenges of financial technology with their own BNPL options.

To comment on a number, Klarna for example, has 87 million active users worldwide, of which more than 17 million are in the United States and another 14 million in the United Kingdom.

Afterpay is perhaps BNPL’s biggest success story of 2020. Having traded its shares below AU $ 9 in March 2020, the share price rallied for the remainder of 2020 and closed the year at $ 118.

We are not only talking about purchases of fashion products, clothing, but there are also a variety of offers that can be applied to BNPL, including airfare and even medical services, which provide the ability for someone to obtain medical care when they need it.

Let’s dive a little into the advantages that BNPL services have for clients and companies …

From a consumer perspective, according to the study by PYMNTS.com and PayPal, the increase in BNPL can be attributed to several reasons, including transparency, spending control and convenience. Respondents also felt that being relatively easy to understand is also a major benefit and, in some cases, the offer contained better terms than more traditional payment options. Rather than adding additional charges to their credit cards or making complex deals, the short-term structured payment plans offered by BNPL, often without interest charges, are much more attractive to customers.

And from the perspective of companies? Where are the benefits?

The economic crisis that caused the coronavirus has affected retail sales significantly, and from the perspective of companies, having a BNPL service creates the opportunity to attract customers, by offering them the flexibility to pay for longer periods, which encourages customer loyalty, leads to higher conversion rates and better customer experiences.

In the case of QuadPay, businesses that have implemented their BNPL product for e-commerce have seen a 20% increase in conversions and a 60% increase in average payment value.

Another benefit for retail businesses is that it provides an inexpensive way for them to dispose of old stock.

And BNPL solution providers do not lag behind the retailer, but instead go directly to consumers to establish themselves not only as secure payment alternatives, but also as trusted brands. Each of them tends to invest significantly in brand building and marketing campaigns, and this gives retailers the opportunity to leverage their efforts, earning free marketing.

And what prospects do you have for the sector?

Although it is not possible to grow at the same rate when the pandemic ends, the outlook is optimistic. Though, at the moment, most of the purchases made with BNPL solutions are related to clothing and accessories, the sector’s commitment goes far beyond this specific segment and points to health services, vacations, home improvements, among others.

Another advance may come from an omnichannel BNPL service in all its facets. BNPL is currently used mostly in digital stores, but some retailers have also implemented it within their physical stores, a move that is likely to become more popular in the future.

BNPL suppliers are also expected to enter banking territory. For example, Klarna became a licensed bank in Europe and has its own loyalty program.

We are talking about the accelerated growth that BNPL’s services have had, the hypotheses that could explain them, the prospects. On the other hand, not everyone thinks that there are only benefits and that BNPL is a low credit risk option …

What are these voices against the BNPL based on?

A survey by consulting firm Capco of UK consumers found that 50% of respondents aged 18 to 34 failed to meet a BNPL payment. Additionally, nearly two-thirds said BNPL led them to spend more than they would have otherwise. This would seem to indicate that there is a lack of education around BNPL: about half of the respondents were unsure whether BNPL meant “taking on debt” or “deferring a payment.”

One hypothesis is that the BNPL segment does not have as much (or is nonexistent) regulatory oversight as in more traditional forms of consumer credit. With no interest payments and fees typically limited to a maximum of four, BNPLs are not regulated by consumer credit laws in many countries.

In this context, regulators are gradually responding, and for example the UK’s Financial Conduct Authority (FCA) recently announced that it would provide greater oversight of the sector, with the understanding that BNPL represents a really easy way to slip into troubled debt.