Digital payment by installment gaining ground in U.S. and Latin American financial markets
Among the new credit formats in digital finance, buy now, pay later (BNPL) has emerged as an accessible, attractive, and convenient solution that’s strategically available at the time of completing a purchase.
BNPL allows customers to defer payment for a product through monthly installments, without generating interest if they are paid on time and offering competitive rates when they are overdue. The service is arranged at the time of purchase and is entirely digital, from the moment of the customer’s onboarding to the application, approval, and the subsequent installment payments.
Physical and online retailers can provide the product directly although they usually enable them through fintechs and electronic payment providers, which lend them the technology and perform basic checks with credit bureaus to determine whether or not to approve the financing.
The purchase is financed by a set number of installments. Customers are not require to purchase any sort of additional service or product, such as a credit card, and the debt is cleared with the payment of the final installment.
The product competes with card purchases made using interest-free installments but differs in that it is more flexible at the time of contracting and unlike cards, does not generate annual fees, commissions or other charges.
BNPL has recently experienced a boom as a result of lockdowns during the pandemic and the increase in online shopping. Users have found value in this solution because it can be processed in a matter of minutes and because it is available for online and physical purchases alike, so it is very easy to access.
In the first two months of 2021, for example, demand for BNPL saw a year-on-year increase of 215%, according to a study by Adobe Analytics, and customers using the product increased their purchase value by up to 18%.
These are all good reasons to give this product a chance within banks’ digital channels.
BNPL USER BENEFITS
Buy now, pay later is giving shoppers the opportunity to take advantage of deals even when they don’t have cash on hand, by offering them a means of fast-access financing.
It also allows customers who do not have credit cards—or even bank accounts—to access the installment purchase system. The BNPL platform Kueski Pay in Mexico, for example, allows customers to make cash payments at Oxxo convenience stores.
It is also a way to reach younger generations, such as millennials or centennials, who tend to be a bit reluctant to use traditional credit products and cautious with their spending as a result of their experience with the 2008 financial crisis and, more recently, the economic difficulties derived from the COVID-19 lockdowns.
In fact, 75% of BNPL users in the United States belonged to these age groups in 2021, according to an Insider Intelligence survey.
With that in mind, clarity should be considered when offering BNPL solutions in digital channels. Apps and wallets should clearly display installment fees, the total value of the purchase, how much the user has already paid and how much is left to pay, while highlighting upcoming payment deadlines and even the number of BNPL agreements the user has at that moment.
Another reason why this credit format is taking off is because by financing typically small amounts, the user does not require a long financial history to qualify.
Low credit scores have generally discouraged installment purchases in retail, wholesale and e-commerce chains, but BNPL does not require premium ratings.
Another benefit of these platforms is that they offer promotions to consumers who can then use them at affiliated merchants.
HOW TO APPROACH THE BNPL MODEL FROM A BANKING PERSPECTIVE?
In the banking space, the BNPL model is taking the fight to credit cards. In the United States, banks lost between US$8 billion and US$10 billion in annual revenue over the last two years due to fintechs offering BNPL products, according to McKinsey’s Consumer Lending Pools study.
The platforms that offer this product have developed a model to make money not through user fees and interest but by charging merchants a fee for each deferred payment. In return, merchants get to improve their conversion rates by offering customers a new payment method.
This is a 100% digital model that satisfies the need for immediacy, thereby complementing the purchase flow and user experience.
Fintechs were the first to digitize installment payments, but banks still have time to capitalize on the trend thanks to a few advantages that could position them ahead of new competitors.
When choosing a short-term credit product, consumers expect to be able to spread payments; in other words, they are looking for options that are less rigid—something that banks can provide via this method.
Another avenue of competition for banking is the creation of integrated shopping apps. In the industry, this path may be akin to building a super app with BNPL options, which allows the bank to be present along the entire service chain, from purchasing to shipping to financing.
Of course, the flexibility of installments and interest will be a plus in the whole process.
In addition, with the integrated app model, banks also effectively leverage their ability to generate traffic and customer loyalty while increasing the average purchase value for their commercial partners.
And here, too, banks have another opportunity to differentiate themselves from their competitors. Experts have warned about the risks of offering multiple BNPL contracts to the same user, which can lead to uncontrolled debt, since by dividing a purchase into small pieces they may think—erroneously—that the cost is lower.
Banks can take a more astute approach than their peers and propose a spending limit based on the average income of each user. Likewise, to encourage the client to stay within their borrowing capacity, the bank can also provide alerts for upcoming payments to help them avoid charges and negative repercussions on their credit record.
In summary, the amount of credit originating at the time of sale is growing and competition abounds. Banks have the tools to participate in the modernization of credit products, accompanying the customer at the time of purchase and providing payment options that suit their needs.