By: René Clayton, Innovation Strategist, PSCU
The fintech market is seeing a flurry of activity for buy now, pay later (BNPL) lending options, and it is critical for financial institutions to understand the impacts. With online purchases growing exponentially, consumers are taking advantage of BNPL’s ease of use in paying later when given the opportunity.
Some of the top companies offering BNPL include Affirm, Klarna, Afterpay, Quadpay and others. Several studies on emarketer.com show that over 50% of U.S. consumers have used a buy now, pay later option in the past 12-14 months since the onset of the COVID-19 pandemic. While BNPL is primarily used for e-commerce shopping, the shift is also moving to the point of sale. According to a recent Research and Markets report, U.S. BNPL payments are expected to grow by 41.7% on an annual basis and reach more than $126 million in 2021.
Merchants have seen a lift in their sales, as BNPL is a fast and seamless payment option. Consumers using BNPL typically add more items to their online shopping cart and are less likely to abandon it because they can pay in smaller increments, and pay later. Behind the scenes, the lending provider agrees on the terms it will offer its end users, such as down payments, installments, caps and interest. The merchant is still paid in full, except for a fee that is paid to the BNPL company (typically 3-6%).
BNPL’s considerable value to borrowers often begins with instant credit approval, with a soft credit check at most. The program does not require a credit card, and often it can assist the accountholder with their cash flow management. Consumers view this as a big win for efficiently managing their payments over time. An Ascent report mentions that buy now, pay later usage growth was largest in the age groups of 18 to 24 (62% growth) and 55+ (98% growth) between July 2020 and March 2021. BNPL is also one of the only options for the underserved or underbanked to utilize credit.
Core financial elements of the BNPL solution began without fees or interest for minor to medium purchases. However, its popularity has grown exponentially, and the amount that accountholders can borrow (even for emergency use) is expanding by the day. The specific number of payment plans and how often the borrower would need to make a payment will depend on which buy now, pay later company the merchant offers. Fintechs are getting creative in providing BNPL solutions to consumers. For example, a technology company called Sunbit is providing a BNPL approach for emergencies and necessities. Instead of offering this opportunity at purchase for clothes or beauty items, the company’s co-founders wanted to provide BNPL for services like car repairs and dental visits.
BNPL has also piqued the interest of regulators. In the U.S., it is still not clear how the government will regulate BNPL services. This past February, the Financial Conduct Authority of the U.K. (FCA) looked to regulate unsecured credit offerings. This idea could spill into the U.S., with similar bodies for regulation. Currently, BNPL activities fall under regulation by the U.S. Federal Trade Commission and UDAAP. Digital payment methods such as BNPL, as well as account-to-account (A2A) payments, cryptocurrencies and central bank digital currencies (CBDC) require a common platform to flourish – and digital wallets are fitting the bill.
Are there risks involved? Of course, especially for the Gen Y and Gen Z generations, who could overspend or have multiple BNPL agreements at once. Currently, there is not a central system in place to oversee amounts or number of accounts in place. A recent Ascent report showed that less than 25 percent of consumers understand the terms of their financing with BNPL. Also, more recent models of the fintech BNPL platforms are charging interest, late fees and missed payment fees.
What Does This Mean for Financial Institutions and Consumers?
Financial institutions should educate their accountholders on financial wellness, including BNPL payment options. PSCU helps FIs safely play in this landscape in offering a piece of this new payment pie, as we vet and curate BNPL companies. PSCU recently announced that we will soon offer a new installment payments solution, partnering with Fiserv to deliver the new capability.
Since lending is a revenue generator for FIs, it is worth considering the BNPL market as a space for FIs to grow their portfolios, attract new accountholders and create more solution offerings.
As an innovation strategist, René Clayton is passionate about helping build the strategic vision for multiple solutions across PSCU. With more than 20 years of experience in technology, management, and product development, she remains committed to innovating new ways of creating unparalleled member experiences. Currently, Clayton is focused on developing and enhancing partnerships with fintechs, as well as open banking opportunities.