With recent layoffs at Klarna and inflation throwing a spanner in the works for many Buy Now, Pay Later (BNPL) providers, the BNPL space is facing tough times. But these issues have not impacted the demand for it. In fact, Apple is entering the space and will be launching Apple Pay Later along with the release of its next iOS update.
Apple’s strategic move makes it clear once again that BNPL is a commodity that every merchant must offer to remain competitive and relevant in the market. Because this payment method is giving consumers what they want most—payment flexibility and convenience.
When brands offer BNPL, they can experience an increase in sales of up to 30% and an increase in average order value (AOV) of up to 70%. Unlike other marketing tools, such as discounts—which do not serve the brand—BNPL can also create positive brand experiences, which foster customer loyalty and brand equity.
But not every type of BNPL option enables merchants to build strong brand equity. Here’s why.
Not all BNPL solutions are made the same
Since installment payment providers operate in different ways, only some BNPL solutions have the power to provide retailers with the brand benefits mentioned above.
For instance, by partnering with a direct-to-consumer BNPL provider, merchants can help their customers avoid high-interest charges, pay in installments, and make a big purchase without having to pay upfront. It means that brands can secure more sales, though they can’t build strong brand equity.
That’s because brands can lose control of the customer journey. Third-party BNPL providers often require shoppers to enter their own sign-in flow within the merchant’s site. Unsurprisingly, these BNPL platforms gain critical consumer data, which enables them to predict future consumer behavior and design more effective marketing campaigns.
White-labeled BNPL providers put merchants in the driver’s seat. They eliminate the middleman, as the financing is embedded into the merchant’s customer journey in their own brand. This way, shoppers can understand the retail brand itself is giving them the opportunity to pay in installments over time. This also creates a positive financing association that’s vital to building a stronger relationship with customers.
Buy Now, Pay Later regulations
Since banks provide more competitive transaction fees than fintechs, merchants can save on financing costs and hold onto more of their revenues if they offer BNPL options from banks.
Merchants need to pay transaction fees anywhere from 3% to 6% of the purchase value. Meanwhile, a bank BNPL transaction can vary from 1% to 3%.
What’s more, companies leveraging a banks’ BNPL programs can boost their brand reputation and consumer trust. Given that a third of US consumers have fallen behind on their payments, according to research from Credit Karma, businesses that prioritize fair and responsible lending, as well as transparency, will be in a better position in the market.
Let’s also remember that last December the Consumer Financial Protection Bureau (CFPB) requested information from five BNPL providers: Klarna, Affirm, Zip, PayPal, and Afterpay. The CFPB has now released a report based on this inquiry, which reveals potentially problematic data collection, debt accumulation and late fee practices. Based on this, BNPL companies will most likely need to give consumers the same protections as credit companies and undergo some massive adaptation.
The probe aimed to prevent irresponsible and untrackable debt. Although the full ramifications on how this will affect the BNPL giants are not completely clear yet, banks are in a prime position to succeed since they are no strangers to operating in regulated markets.