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Buy-Now, Pay-Later (BNPL) is short-term financing usually available to buyers at the point of sale. It functions as credit, allowing customers to buy a product now and make split payments or installments in the future. Generally, BNPL does not charge an interest on the amount payable.
Different platforms implement the buy-now, pay-later feature in different ways. But in the present circumstances, with a global pandemic driving digitisation, the application of BNPL is being seen most commonly in-app, at the point of sale. BNPL’s success is exemplified in US-based FinTech Affirm’s association with exercise equipment manufacturer Peloton which accounted for 30% of its revenues. Peloton’s customers, given a choice between credit card payment and 0% BNPL financing, chose the latter and boosted sales.
How BNPL works
Once they select the BNPL option at checkout, a customer's credit profile is evaluated and approved or rejected within seconds. Then they make a portion of the payment right away, say 25% of the total amount. The remainder is paid over the coming weeks or months - most BNPL facilitators offer a repayment window of 3 to 36 months - through their desired mode of payment.
Due to the COVID-19 pandemic, widespread financial insecurity affected most workspaces in the form of salary cuts, tight budgets, and layoffs. In such a time, BNPL lets customers finance their major and minor purchases in a flexible and interest-free way, giving respite from big-ticket one-time expenditure and steep credit card interests.
A credit-averse sentiment prevails in India. This manifests in its measly 3% credit card penetration. Interestingly, forecasts show that by 2024, BNPL will account for a market share of 9% among e-commerce payments methods as compared to the current 3%. BNPL in India is growing at a compound annual growth rate (CAGR) of 36%, and is projected to touch $100 billion by the end of 2023. The absence of interests and ease of payment are the drivers of these numbers.
Trends in B2C
So far, BNPL has been majorly focused on business-to-customer (B2C) platforms. It is used to pay for consumer products across a variety of sectors in recurring bite-sized, digestible payments. Here are some of the trends emerging in the use of BNPL in the B2C businesses-
Attracts younger customers
This payment method appeals to digitally literate younger generations such as millennials and GenZ who either form a significant chunk of the existing workforce, or are entering it.
Increased BNPL integration by merchants
As more and more young people adopt BNPL, merchants are integrating the payment method on their platforms. The number of Shopify e-commerce businesses offering BNPL increased 60% in March 2020. BNPL does not give businesses a competitive advantage anymore - it is slowly becoming a necessity to stay in the game.
A host of FinTech companies are rushing to provide integration of BNPL tools to businesses. In the US and Australia, entities like Affirm, Klarna and Afterpay are spearheading the innovation and development of BNPL products. Fearing a loss of revenue, institutional banks are now hot on the heels of these companies.
BNPL and B2B
All businesses rely heavily on credit – both formal and informal. MSMEs, especially, rely on informal credit from trusted sources. These could be local distributors who agree to deferred payments because of mutual trust. For MSMEs, switching to BNPL would mean losing out on informal credit from these trusted associates.
Regardless, bringing BNPL into the mainstream of business payments holds the potential to solve the problem of lack of access to unsecured credit. Integration of BNPL in B2B transactions offers a number of benefits-
· BNPL's flexible payment schedule would ensure that the cash flow needs and working capital issues of a business are resolved.
· The seamless experience offered by BNPL payments will come in handy for buyers and sellers when the frequency of orders placed is high.
· Customer experience is important in B2B transactions as well. BNPL offers convenience, which will translate to better conversion rates, average order value (AOV), gross merchandise value (GMV) and customer lifetime value (CLTV) for seller platforms.
BNPL vs other forms of credit
BNPL payments distinguish themselves from credit card payments in that they charge zero or lower interest rates. The rate of approval for such payments is also higher. Compared to credit cards, buy-now, pay-later offers more comprehendible and transparent terms on which credit is given.
Unlike term loans, BNPL lends in a seamless, fluid and recurring fashion. Term loans are directed at one-time needs, and are accompanied by a lengthy and tedious application process. Businesses have unpredictable needs and must routinely maintain their cash flow. BNPL is far more suited than loans on a day-to-day basis.
Uses cases and implementation
As e-commerce and digitisation reign supreme, the provision of BNPL payments is being offered in numerous innovative ways online. The idea is for lenders or service providers to integrate BNPL tools into a merchant’s app or website.
These third-party platforms allow banks to promptly offer the BNPL so that they may diversify their lending portfolios. White-label partnerships with companies that already provide BNPL services give access to a templated product or suite of services. Barclays Consumer Bank and BNPL firm Amount have collaborated to create a white label platform.
Customised BNPL platforms, created when a company enters a partnership with a bank for a specific goal, may have much wider-reaching effects. Apple and Citizens Bank collaborated for the former's upgrade financing program. Such application of BNPL brings added benefits like access to consumer data and brand awareness.
Integrating financial services into a non-financial platform is another way in which BNPL can be offered by businesses. This method, called Embedded Finance, allows lenders to provide in-context and tailored credit within the app itself. This makes for better user experience and facilitates seamless transactions.
Embedded finance also enables lenders to underwrite small, short-term loans based on data from previous transactions and orders. The approval and disbursal of such loans, if sanctioned, is instant, along with provisions for flexible repayment.
BNPL has been optimised for various business models through embedded finance, white-label and standalone platforms. This payment method has seen tremendous success in B2C transactions. This has ultimately paved the way for reimagining recurring credit for small businesses in B2B.
BNPL can be used to iron out difficulties caused by insufficient and unstable credit sources in the B2B context. It solves the problems of high interest rates and fixed credit amounts that accompany credit card or loan payments. There is a race among e-commerce businesses to offer BNPL. Embedded lending solutions, provided by tech companies, enable these online businesses to offer BNPL on their platforms through easy, seamless integration.