The Covid-19 pandemic is with us for more than a year now. The pandemic has not only affected our physical and mental health but also our financial health. Many of us had got fired or got pay cuts due to the pandemic. Isn’t it? Unfortunately, most of us are facing financial hardships during this unstable and uncertain situation.
Yes, people are facing both health and financial crisis at the same time. Most people do not have sufficient funds and can't afford to pay interest, loans, fees, or credit cards to meet their monthly expenses. Thus, most of them started looking for alternative payment methods. With more and more people facing a similar economic situation, it has fueled a new trend or a payment technology revolution.
With eCommerce on the rise, Buy Now, Pay Later (BNPL) point-of-sale has become the favorite alternative for payment. BNPL has enabled millions of people worldwide to afford products that are mandatory amid lockdowns and financial difficulties.
BNPL is one of the fastest-growing segments in FinTech sectors in recent times. Of course, it benefits both retailers and customers. Retailers allow BNPL as a checkout option for their shoppers as they want to bridge the drop in revenue during the pandemic and budget-savvy consumers can get the product immediately with the flexibility to pay in full later without any extra costs.
Traditionally, the installment plans were for only big purchases like furniture or electronic gadgets. Whereas now, many fintech startups like Afterpay, Klarna, and Sezzle are providing a new kind of consumer behavior. Yes, they are normalizing the BNPL methods for everyday purchases as low as $35.
Now, let us explore the BNPL method further. Read on to know how it functions, its benefits, top BNPL companies, and how it will impact various industries.
What is Buy Now Pay Later (BNPL)?
Buy Now Pay Later (BNPL) is more like using a credit card or getting a soft loan. BNPL shopping enables the shoppers to buy products and pay back in installments after a certain period, like in a few months.
Practically, the consumer makes online purchases without paying the bill at checkout. It is a simplified process where the customers get the loan quickly. However, the customer needs to pay back the loan on time to avoid any late payment charges.
BNPL is a favorite option for many consumers for its flexible financing options and interest-free payments. Yes, BNPL usage has already started skyrocketing in many industries.
How does BNPL work?
The BNPL option increases the purchasing power of the consumers and decreases the chances of abandoning the shopping cart during checkout. The shoppers can break up their total purchase amount over periodic installments without any interest. The consumer can purchase any items like clothing, food, fitness equipment, home furnishing, etc.
The customer gets to choose the Pay Later option for payment through the preferred vendor. Thus, instead of entering credit card details for billing, the shopper will confirm the payment terms (number of payments and amount of each payment), total cost, and account information for the recurring payments.
The growing BNPL companies are attracting customers by adding a no-cost payment option. The lending programs are not credit-card-based but work in installment microloans. So, the consumers need not enter their credit card details. Thus, they can avoid getting any negative effect on their credit profile that may further lead to debt.
Without charging any upfront fees or additional cost from the consumer, the BNPL fintech relies on the merchant to pay a percentage of the sales price as revenue, ideally 4% to 6%. BNPL companies can also leverage virtual credit cards to facilitate consumer purchases that can earn additional interchange revenue per transaction. Finally, some of these BNPL firms do charge consumers penalties if they miss their automatic installment payments.
Benefits of BNPL for the Consumer and Merchant
The above graph shows the usage of Buy Now Pay Later (BNPL) apps in the US in 2020. Now, let us learn how it benefits both the shoppers and the merchants.
For Merchants
- The Buy Now Pay Later option enables the merchant to process more transactions during this economic downturn.
- With the BNPL option, the merchants can get more repeat customers.
- The BNPL further enables increased shopping cart size while dramatically reducing the shopping cart abandonment rate.
- The BNPL boosts word-of-mouth marketing. That means the existing shoppers let their friends and family know about their purchases, encouraging them to buy as well.
For Consumers
- Offers excellent real-time shopping experience - Unlike signing up for a credit card that demands personal details and verification processes, BNPL is approved in real-time and on one screen. It increases the buying power of consumers and reduces the checkout times, ensuring a pleasant shopping experience.
- Get qualified immediately - Most young shoppers often have an insufficient credit history to get credit card approval. The BNPL providers use alternative data to approve their customers instantly without doing credit checks.
- Avoid debt - Youngsters tend to use credit cards for their online purchases and often end up with debt. BNPL also helps the consumer to avoid any debt or additional charges.
Top BNPL Companies
BNPL companies have been around for a few years. But, we saw the recent surge in demand due to the pandemic. The BNPL app download had increased drastically in the last two years.
You can find some of the well-known BNPL firms in the above image. The Fintech startups are already booming, and they will only continue to expand further in the future.
Industries that can Leverage BNPL
Buy Now Pay Later can impact any industry including financial institutions, fintech companies, and banking technology providers. It is never too late to join the club. We are here with some sectors that can leverage BNPL and scale greater heights.
❖ Banks
Banks can come ahead and offer portfolio financing programs to BNPL fintech as a capital partner for short-term microloans. As the industry becomes more prevalent with this alternative lending program, high ticket items like vehicles and group tour packages may require funding from institutions. However, fintech and banks have already partnered with deposit products. Soon, we can expect a lending partnership too.
❖ eCommerce Industry
eCommerce platforms have already started partnering with top BNPL companies. Walmart and Shopify are to name some. Smaller and other niche-oriented platforms should also start leveraging the BNPL method.
The travel industry had faced massive trouble during the pandemic and can utilize this BNPL method to fulfill the pending demand for vacations and getaways. Moreover, the entire eCommerce industry is waiting to see how a giant like Amazon will get started with BNPL.
❖ Card Companies
Card companies have already started experiencing a disturbance in their revenue generation due to Buy Now Pay Later. The largest card networks have made some moves in this area so far.
Yes, Visa purchased a demanding position in Klarna (a Swedish fintech company) way back in 2007. It even developed its internal installment program for developers within its issuance network as a pilot. AMEX provides installment financing options on its platform after a customer purchases at any retailer.
We can expect the remaining card networks to experiment with their partnerships and programs in the next year, allowing banks to customize features and options for cardholders.
Wrapping Up
Any new business will flourish if it focuses on people’s genuine problems and provides solutions to their problems. The business industry has been evolving for years now as per changing needs of consumers. One such recent change is BNPL fintech startups that focus on offering solutions to people’s current financial difficulties.
With unemployment and pay cuts, the BNPL has been a boon to many with unstable income. People without credit cards embraced this BNPL as they can avail of it immediately without any additional charges.
Though the BNPL fintech firms are already booming, the best is yet to come. With the ongoing pandemic and financial distress, many will opt for BNPL for sure. Many financial institutions and banks will start partnering with BNPL firms and provide immediate loans for the diverse needs of consumers.
As a business owner, do you like to invest in fintech apps? It will help you stay competitive by offering Buy Now Pay Later (BNPL) option to your customers. All you need is a reliable software development company to outsource your fintech app development. Cypherox Technologies can offer various fintech IT services that you can leverage to your business advantage. Feel free to reach us for your fintech app development.
