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Buy Now, Pay Later (also known as BNPL) as a consumer financing option—and, importantly, a merchant marketing tool—is a relatively recent arrival to the scene, if also a fresh branding of a not-so-new idea.
PayPal’s June 15 announcement of its Pay Monthly product, allowing customers to make a purchase and break the payments over a period of six to 24 months, proved a good entry point for a PaymentsJournal Podcast Show discussion among three veterans of the consumer lending space and its associated technologies:
- Brian Riley, the director of credit advisory service at Mercator.
- Apur Shah, PayPal’s senior director of merchant growth.
- Randy Broadbent, the national account manager/solution consultant at Zoot Solutions, an enabling technology behind PayPal’s offering.
PayPal’s initiative comes at a time when BNPL offerings are undergoing a shift. Originally driven by younger consumers attracted to no-credit-score decisioning, BNPL has made strides toward being governed by more traditional aspects of consumer credit.
Riley, Shah, and Broadbent discussed a range of topics, including what PayPal saw in the BNPL space that prompted this new offering, the challenges involved in credit risk decisioning and underwriting for BNPL services, how the players in the space are shaking out, and the perspective of merchants and how they drive BNPL.
After all, Riley pointed out, it’s a merchant-centric payment proposition, which is the twist that BNPL puts on older, similar financing models that were centered on the consumer.
“It really shifts the center of the transaction,” Riley said. And that, he said, is good news and bad news. With BNPL, merchants have been able to bring in entire new segments of customers. On the flip side, with decisioning that hasn’t always hewed to regular consumer lending standards, there’s been “skyrocketing risk.”
The current view of Buy Now, Pay Later (BNPL)
Shah noted that the basics of BNPL are nothing new to PayPal, pointing to its 2008 acquisition of Bill Me Later, which it went on to rebrand as PayPal Credit. However, he did draw a distinction between how BNPL was utilized before the pandemic and how it’s evolving now. Before, he said, it was mostly focused on younger demographics and their interests: “Fashion, electronics, home, a bit of travel.”
“What we’re seeing now,” he said, “partly because of the pandemic and partly because new, larger entrants are coming into the space, is adoption across all consumer segments and adoption across all verticals.”
At its core, Shah said, BNPL is “fundamentally a lending product. You have to know how to run that business…if you want to be able to scale in the space.”
Shah sees growth ahead for BNPL, even amid current economic uncertainty. PayPal’s new offering changes the dimensions, allowing for bigger-ticket purchases stretched out over longer repayment periods. “It’s not a question of whether Buy Now, Pay Later is here to stay or grows,” he said. “It’s just how it grows, whether it grows responsibly, and how it pivots to meet the demands of the cycle we’re going through.”
Decisioning and Risk
Broadbent traced the modern-day iteration of BNPL to millennials and younger consumers who embraced it, attracted by the no-credit-check entry into the purchasing arrangement—or, as Broadbent put it, “if you can fog a mirror, here you go, financing.”
In Europe, however, where this version of BNPL got its start, regulators and credit bureaus have begun pushing back, positioning the vehicle in more traditional retail credit underwriting. In the United States, the arc is following suit.
The challenge for BNPL providers, Broadbent said, is to employ the more traditional rules of advancing credit while also creating a seamless experience for consumers and the merchants that want to sell them products. The hallmarks of those experiences include:
- Instant decisioning
- A frictionless experience
- Ease of use (that is, the payment solution is integrated at the point of sale)
“At the crux of all that is the idea that we need flexible rules,” Broadbent said, the kind that allow lenders to react when a consumer is underwater and when fraud is being perpetrated.
Riley noted that more traditional lending rules will also help ensure consumer relationships merchants value. “Anybody through the turnstile” can artificially swell the ranks but “the hope with a customer relationship is that it goes on a while,” Riley said.
The State of Play in the Buy Now, Pay Later Provider Space
While the easy view of BNPL might be that fintechs and other upstarts are the dominant players while more traditional companies have been slower to enter, Riley advocated for a more nuanced view. PayPal, for example, is both a fintech and a maturing company.
“From the perspective of a merchant to its funding source, the merchant needs someone who’s going to be there tomorrow, and next year, and the year after that,” he said.
Shah said that was the view PayPal took toward expanding its credit offerings with Pay Monthly and its flexibility with bigger purchases and longer payment timeframes. He said the company is well positioned to thrive as a more traditional lending environment settles over BNPL.
“Working with regulators, working with credit bureaus is just part of what you have to do to run a good business and keep that responsible growth,” he said.
“From a merchant point of view, doing business with those more established providers can make or break your own reputation in the long run. We think we have a pretty good shot at being a top player in the space.”
The Merchant Perspective
Merchants want customers and sales. Customers want payment flexibility. BNPL fills a need.
“Customers are always going to pay the way they want, when they want,” Shah said. “It’s why people carry so many different payment methods in their wallet.”
With BNPL, even under tighter standards of credit decisioning, the control point shifts, he said, offering a way in for consumers who can qualify for credit but are fee-averse or interest-averse or long-term-debt-averse.
And then there’s the marketing power of BNPL and its ability to pull new customers into marketplaces, whether online or in physical store locations.
“You can’t ignore the power of that merchandising tool,” Shah said.
