Buy Now, Pay Later continues to grow in popularity after the pandemic catapulted the payment option to the forefront of consumers’ minds. Here’s what you need to know.
The retail industry has transformed in the last decade. Digital channels have grown exponentially, encouraging consumers to prioritize convenience and ease of purchase. Global E-commerce sales are predicted to reach $7.4 trillion in 2025 — and it’s not just where people shop that has changed: how they pay is also evolving. Online purchasing has exposed consumers to new payment methods, such as digital wallets, contactless cards, and installment payments. The retail finance market is booming as a result of these behavioral shifts.
Increasingly, people are taking advantage of new services like Buy Now, Pay Later (BNPL), so much so that McKinsey estimated that installment-based, flexible payments, and instant credit options would grow by 20% in 2021. These solutions function through embedded finance, meaning that the merchant can integrate this payment method directly within their platform. Removing the hassles of moving to a new page to checkout, BNPL is becoming one of the easiest — and most popular — ways to pay.
As shown by the growth of E-commerce, many consumers have come to favor the convenience and accessibility of online shopping over in-store purchasing. E-commerce payments don’t require a physical payment method, such as cash or a credit card, while the ability to save payment information online can turn checkout into a one-click process. Mobile is quickly becoming a favorite channel, with Worldpay forecasting that digital wallets will account for 51% of E-commerce volumes by 2024.
This disruption at the checkout has encouraged consumers to consider other payment alternatives that offer convenience, namely BNPL. BNPL splits the total purchase sum into a series of installments, allowing consumers to pay for their goods over time — but without the interest rate of credit cards. This is particularly appealing to younger demographics that have been rejecting traditional credit; it is estimated that only 1 in 3 Gen Z-ers have a credit card.
Credit cards may not be as popular, but high credit scores are still very much in demand, which can be tied to the competitive housing market and the desire for low-interest rates. BNPL also appeals to those shoppers who want to improve their credit score but are maybe reluctant to open (another) credit card account. In a study from Sezzle and PYMNTS, roughly 40% of respondents cited using an installment credit product as a method of raising their credit score.
BNPL providers see significant interest from the public, but there is also growing attention from regulators. The financial industry has always embraced regulation as a way to protect both consumer and corporate finances, yet BNPL services have been able to avoid facing many restrictions due to their newness. As market share grows, larger governing bodies can no longer ignore BNPL, and many of these groups are now announcing plans to regulate these services.
What this means for the industry is as yet unclear. Currently, much of the appeal of a BNPL service is that consumers can sign up quickly and immediately gain access to spending credit. Interest-free marketing can also obscure the fact that many providers charge late fees, which can still put shoppers in indebted financial positions. If new regulations address these risks and demand more comprehensive application reviews, consumer appeal may diminish. BNPL providers will therefore need to position their products in a new way.
As more consumers turn to alternative financing options like BNPL, traditional lenders face increasing pressure to keep up. FinTechs that offer zero-interest BNPL solutions are scooping up market share and creating competition against other types of consumer loans. Alternative financing options tend to be geared toward younger generations and the FinTechs that create these payment options have a keen eye toward the flexibility younger generations crave. Traditional lenders will have to step up their game and find new and enhanced ways to connect with millennials and Gen Z to compete.
The financial industry does not yet know what these new regulations will look like, but it can be confident that consumer interest in BNPL remains at an all-time high. Consumers are still interested in the value proposition of paying for goods over time and improving their budgeting, just as they enjoy fast online checkouts.
Rather than regulation spelling the end for this booming market, BNPL solutions will likely need to be reshaped for 2022 and beyond. New features will need to accommodate both compliance and consumer preference, minimizing risk while still offering valuable spending credit. And the market resets could prove to be an exciting opportunity for new players to enter the scene, whether traditional banks or even merchants themselves.
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