During the COVID-19 crisis, buy-now-pay-later (BNPL) emerged as a hot segment within consumer lending when a large portion of consumer spending moved online. By venturing into BNPL space, financial firms can create a niche by transforming into two-sided marketplaces where they not only facilitate transactions but also provide a marketplace for discovery of new products. This enables access to granular customer data that can be used for credit assessment.
How lenders can enter the BNPL space
Participating in the BNPL space will require financial institutions to invest significantly in technology capabilities as well as marketing initiatives. Lenders who want to take advantage of the opportunity in BNPL can try few different approaches and increase their chances of success in the BNPL space.
Customer Affordability as a Service: As economic activity rebounds, people are facing elevated levels of inflation with potential increases in interest rates forecast in early 2022. To meet the increasing regulatory requirements and to ensure good customer outcomes, firms need to work towards more customer-centric affordability assessments. The introduction of consistent modelling for income and outgoings across all areas of the business will give lenders increased control, consistency, and agility to react to regulatory changes.
Purpose driven: Lenders can determine what each customer can afford, educate them, and help them avoid overspending by managing their overall limit and exposure.
Holistic approach : Firms can manage the merchant acquirer and card issuer businesses holistically, which will enable them to run connected campaigns and manage a combined P&L for the two businesses.
Loyalty and personalization: Lenders can proactively create offers and manage real-time personalization of both in-store and e-commerce purchases. When there are multiple offers at the checkout, customers will choose the most personalized and relevant option. Banks will be forced to be contextual and relevant at the moment of purchase.
Charging into to the BNPL battle
Traditional card issuers and consumer lenders can’t afford to ignore the BNPL trend-some have already launched and others are working on their own variation. In its simplest form, BNPL is not a new proposition, and usually involves offering customers the facility to break payments for goods and services into multiple installments.
Lenders can increase customer engagement, wallet share, and loyalty by offering seamless, convenient shopping experiences. BNPL can benefit incumbent banks that can use existing strengths, such as better loan term and condition flexibility and increased capital utilization owing to quicker loan turnover and lower regulatory capital requirements. BNPL also provides cross-selling opportunities to bank and non-bank customers who are likely to be more engaged.
As far as customers are concerned, even though they pay in installments, they gain full ownership of the product. The fixed payments help them budget their expenses. Customers also tend to prefer BNPL for purchases under a threshold such as $500, and anything over that, they prefer instalment plans that can stretch up to a year.
Key takeaways
- Buy now, pay later arrangements are point-of-sale installment loans that allow consumers to make purchases and pay for them at a future date.
- Consumers typically make an upfront payment toward the purchase, then pay the remainder off in a predetermined number of installments.
- Buy now, pay later plans often don’t charge interest and are often easier to get approved for than traditional credit cards or lines of credit are.
- Normally, BNPL doesn’t affect your credit score; however, late payments or failing to pay can damage your credit score.
Road ahead
BNPL has suddenly emerged as a disruptive force in the payments and consumer finance industry. It needs to be seen as not just a new twist to merchant payments, but as a paradigm shift in how banks can engage with their customers and increase revenue. Existing and emerging digital payments require embracing technology and innovation along with a safer digital experience to win the trust of customers.
In the tech-driven payments space, open banking and real-time payments infrastructure is expected to create innovative payment solutions for customers, and new pathways to accept payments for merchants and corporates. To retain customer base and a competitive edge, Lenders must quickly foray into this segment. Accomplishing this, however, may require them to partner with a service provider with the necessary contextual knowledge and technology expertise after a comprehensive market analysis.
