The Future of Buy Now Pay Later
Buy Now Pay Later; modern day installment plans that seamlessly integrate with Point of Sale systems to offer a sleek embedded lending experience for any purchase size. What started as a niche payment type has exploded in popularity, gaining traction amongst younger generations over the past 10 years. It is expected BNPL will account for nearly one quarter of global ecommerce transactions by 2026.
BNPL is not without its fair share of controversy. BNPL can be touted as 'free credit' that democratizing access, or a major risk to younger generations that are duped into increased debt from hidden fees. A further area of controversy is the question over regulation. Globally, despite growing interest from regulators, BNPL is not regulated in the vast majority of countries like other credit products such as credit cards. Finally, there is the perceived threat BNPL Fintechs pose to banks' credit card revenue.
What is the current state of BNPL?
In Canada and the US, BNPL has been steadily increasing, offering flexible options for consumer demand fueled by the pandemic and increased cost of living. Payments Canada estimated BNPL will grow 55 per cent annually in Canada, with its value increasing from US$2.5 billion in 2020 to upwards of US$17.6 billion by 2028."(1) In the US, BNPL is expected to grow from USD 22.86 billion in 2022 to USD 90.51 billion by 2029. (2)
Some major events in the BNPL space occurred earlier this year:
The UK released draft regulations on BNPL installment schemes.
The deadline passed for Australia's Options paper for feedback on BNPL regulation
The Logic reported AfterPay was lobbying in Ottawa to prevent regulation (3)
In Canada, BNPL is not federally regulated, but there is some applicability for provincial regulations. However, even the provincial regulations are murky in this context(4). A pilot study was conducted by the Government in 2021 to study the use and understanding of BNPL services. The study found the majority of Canadians had a positive experience using BNPL services, but the data pointed to potential risks that the Government will monitor further.
Like Canada, BNPL is not federally regulated in the US but does fall under some state laws. As most BNPL schemes bill users in four installments they fall just below the five-installment threshold where traditional bank loan regulation kicks in. (5) The Consumer Financial Protection Bureau opened an inquiry into it in late 2021 and published it's results just this past March. The survey found that the majority of BNPL borrowers did not show any indications of financial stress, but on average were found to be more highly indebted compared to non BNPL borrowers. The report also found, contrary to popular belief, the majority of BNPL borrowers do in fact have access to credit. (6)
What is the future of BNPL?
At the end of the day, controversy or not, BNPL is here to stay. However based on the level of interest in regulation in the UK and Australia, it is safe to assume BNPL will also come under similar scrutiny in Canada and the US which will have an impact on the sector. Generally speaking, this impact should be positive. Big players will probably be strengthened over smaller players (such as those without big merchant partnerships that tend to charger higher fees). This is especially the case in the current economic environment. With greater clarity on regulations there will be more consumer rights, better dispute resolution, and healthy competition. Of particular interest will be if and how BNPL activity will report to credit bureaus. If done in the right way, this could help those without credit history build up their scores.
In the meantime, there are some key insights to be learned from the rise of BNPL for banks:
BNPL's popularity is more than just installment plans and banks need to look beyond installments to compete. Many banks have added installment payment options to their credit cards but they are not as popular as pure BNPL services. This is because the innovation BNPL is driving is derived from the fact that BNPL is embedded into the buying journey and enables consumers to understand up front the total cost of purchase across the installment options. In this sense BNPL is a budgeting tool and is in turn part of its appeal. It allows the certainty of how and when consumers will pay for what they want to buy.
BNPL offers a valuable lesson in how to appeal to different demographics and segments. BNPL appeals to the younger generation, whose payment habits are much different. Studies have shown for those between 18-34, a fast, convenient payment experience is critical. For example, they are more likely to choose an online retailer based on how easy it is to check-out, and are more likely to make a spontaneous purchase because their payment data is stored within an app or online.(7) These studies prove why BNPL is so successful amongst the younger generations and why Banks need to consider the risk of losing access to millennials and Gen Z.
Banks can learn from the data and trends to identify target use cases. For example, BNPL is still popular amongst the more affluent market (who would have credit cards). This segment shows interest in using BNPL for larger ticket items, a use case that Banks should be considering at POS.
BNPL will push the industry for further innovation, while operating (eventually) within a regulated environment. Banks can learn from these models, take the appealing aspects such as the user experience, and combine with more robust requirements to offer their own products. Take CBA in Australia as a good example; their StepPay product integrates seamlessly into their mobile app or digital wallet and automatically splits purchases into 4 payments. If a user misses a payment their account is frozen so fees are capped.
BNPL is an interesting use case in financial product innovation. With volumes continuing to increase it is clear it is here to stay and regulators and banks need to navigate the space to find a model that is sustainable and mitigates risks for businesses and consumers.
References
1) https://payments.ca/buy-now-pay-later-it-here-stay
7) https://payments.ca/younger-generations-driving-force-changing-payments
Written by: Jennifer Jarvis, Head of Advisory and Channel Partnerships.