Recently and expedited by the boom in eCommerce, Point of Sale lending or Buy Now Pay Later (BNPL) has rocketed into existence. Merchants and platforms should view BNPL as another card type, expanding their payment method. It is especially alluring for larger transactions as it allows the consumer to split the transaction into smaller payments.
It is distinct from Layaway and is a short-term loan. Consumers pay an installment at the time of purchase followed by 3 to 5 additional payments. The consumer can receive the goods or services immediately and often at very low or zero interest rate. Adoption is soaring and will be a viable alternative payment method for both merchants and platforms. Several FinTechs have a BNPL offering including:
- Affirm
- Afterpay
- Klarna
- PayPal
- Sezzle
- Splitit
- Zip (previously Quadpay)
Decision engine that could
BNPL is favored by younger consumers who eschew traditional credit and prefer the low or no cost financing. The merchants benefit as they can sell goods or services to consumers who may not have the available credit. Tour companies and airlines, for example, could sell trips to consumers who may not have the funds to fully finance the trip. Jewelry and high-end retailers may sell items at peak times and at a higher price than when the consumer has fully saved for the purchase.
Key for BNPL companies is to leverage their technology and connectivity to make instantaneous credit decisions. Consumers need to know at the time of their transaction whether they were approved and the BNPL companies need to make prudent underwriting decisions.
Pay me now and later
BNPL companies get paid directly by the merchants and platforms. The fee is typically 3 to 6% of the purchase amount and while this fee is more than a traditional discount, it should expand sales. The BNPL firms accept the credit risk and are also able to earn fees from the consumer in the form of interest on balances carried beyond specific terms.
YOLO
BNPL companies raised over $1.5 Billion in 2020 and this year’s market looks even hotter. In early August, Square shelled out $29 Billion for BNPL provider Afterpay. In September, Paypal spent $2.7 Billion on Japanese BNPL firm Paidy and Goldman Sachs announced it would acquire BNPL lender GreenSky in an all-stock deal worth $2.24 billion. Amazon announced it is working with Affirm to make its offering available to Amazon resellers.
These firms recognize the tremendous opportunity and incremental value BNPL offers. Both Visa and Mastercard recognize the potential BNPL holds for circumventing their rails. Visa set up a website to assist its members facilitate point of sale loans. Mastercard announced it is partnering with some of the largest existing card issuers and coming out with its own interest-free, point of sale loan, named ‘Mastercard Instalments.’ The other benefit of the card brand solutions is they carry the same consumer protections as a traditional Visa/Mastercard transaction.
Obviously utilizing Visa or Mastercard to enable BNPL, will drastically reduce integration efforts and allow existing POS to accept BNPL. This avenue, however, needs to provide for both Interchange AND the BNPL costs. Certainly, Visa and Mastercard can modify the economics to support a BNPL Interchange and existing card issuers may charge less than FinTech upstarts, but until then, the existing rails will be more expensive.
The alternative, however, requires additional integration and for BNPL companies to incrementally add new merchants and platforms. Doing so will result in the direct transfer of business and transactions from traditional lenders to FinTechs. Additionally, once this integration is complete BNPL providers will be able to offer the service for everyday purchases, and at a fraction of the cost to traditional card network Interchange. BNPL has the potential to truly create another payment option.
It is readily adopted by consumers, especially younger members. McKinsey forecasts that BNPL providers will grow penetration from 7 percent of US unsecured lending balances in 2019 to about 13 to 15 percent of balances by 2023[1].
Obviously, the mechanics and economics will need to be hammered out but once the rails are laid, the cost for adding incremental freight is incidental and infinitesimal.
The third rail
Before we crown BNPL as the third rail, however, it does have some proving to do. First, will it sustain profitability in a rising rate environment? Second, what is the charge-off rate? According to a study conducted by Reuters for Credit Karma, nearly 40% of U.S. consumers who used “buy now, pay later” have missed more than one payment.
This is significant as Afterpay bans customers from usage for missing even a single payment.
BNPL is not yet a forgone conclusion. Nevertheless, merchants and platforms should consider their payment methods and whether BNPL offerings could expand sales and fit within their customer base. With all the excitement, now might be the prudent time to receive BNPL incentives to integrate this additional payment method.
