Buy Now Pay Later (BNPL) is racing into 2022 firing on all cylinders, and according to Insider Intelligence, is expected to keep growing at pace and will reach $680 billion in transaction volume worldwide by 2025. The promise of impending regulation, and the need to balance oversight with consumer protection, will see the emergence of new innovative solutions and business models. As competition heats up and new players enter the market, banks will naturally get in on the action to protect their market share.
Let’s look at four trends that will disrupt the BNPL industry.
1. BNPL WILL EXPAND ACROSS INDUSTRIES
There are few differentiators between BNPL services, as the model is essentially based on two things: being able to split payments in equal parts and the ability to pay later. This makes it easy to replicate the model across industries. Therefore, BNPL companies are differentiating themselves by entering new markets, and fintech start-ups across industries – be it travel, insurance, healthcare, B2B trading, or even blockchain and crypto currency – are jumping on the BNPL bandwagon.
Klarna partnered with Expedia Group to allow their customers to “travel now, pay later” and recently acquired Inspirock, an online trip planner which uses artificial intelligence (AI) to recommend trips based on a person’s interests. Also, Affirm has partnered with American Airlines to allow passengers to “fly now, pay later”.
As the BNPL model expands into other industries, insuretech company Ascend is expanding its BNPL commercial insurance offering using payments APIs that automate end-to-end insurance payments. In healthcare, US fintech start-up Walnut partners with healthcare providers to allow patients to pay by instalments.
Two more examples: London-based fintech Hokodo offers BNPL to digital B2B merchants, using trade credit APIs to provide real-time underwriting and financing decisions. In the southern hemisphere, Australian fintech @Pay is taking BNPL innovation a step further – it’s the first BNPL platform integrating blockchain technology and crypto currency.
2. BANKS WILL ENTER THE BNPL MARKET
Banks are seeing a share of their credit card and consumer loan revenue cannibalised by BNPL lenders. The time is right for banks to enter the BNPL market but having the right market entry strategy and business model is key to succeeding. Being a regulated industry, banks are experienced in regulatory compliance and credit underwriting and have the data and customer base to compete in this space. Banks are also well placed to determine affordability and can personalise BNPL offers based on a customer’s risk profile using their financial data. But they will have to act fast or risk missing the boat.
Some banks, such as Barclays, Monzo, Revolut, and Santander, have already made inroads into the BNPL market. Santander launched its BNPL product ‘Zinia’ in Germany a year ago and are now rolling it out to other markets. Zinia allows shoppers to split their purchases into monthly instalments interest-free. Monzo launched its Flex product, which allows 3 instalments for free, but longer plans with 6 or 12 instalments will attract an interest rate of 19% APR (variable).
As regulation kicks in, I expect to see more banks moving into the BNPL market – either via partnerships, acquisitions, or by building in-house solutions. Whatever the market entry strategy, banks will stand a better chance of winning if they integrate across the entire purchase journey. These integrations will not only contribute to scale and engagement but also provide better visibility into customers’ credit behaviour and deliver greater value to the end customer.
3. SUPER APPS WILL BE A DIFFERENTIATOR
As BNPL players scale and increase engagement, we can expect to see super apps offering a combination of shopping, financing, payments, and banking products. Klarna, Affirm and PayPal have already joined the fray and launched their own super apps. Klarna’s super app transforms the BNPL giant into an end-to-end shopping hub, enabling shoppers to use their instalment service at any online retailer, whether they are partnered with Klarna or not. PayPal’s super app offers an all-in-one financial and shopping solution. PayPal CEO Dan Schulman said the company wanted to provide customers with a “customized and unique shopping, financial services, and payments experience”.
In the emerging Middle Eastern and Central Asian markets, ZoodPay is one of the first super apps using BNPL to enable financial inclusion across the region. It integrates with a marketplace of merchants to offer instalment payments to the underbanked, both online and in-store.
The unique selling point of super apps is that they offer an integrated, seamless, and efficient experience without having to switch between apps. As competition heats up, super apps will be a big differentiator in the BNPL industry. To gain a competitive advantage and engage consumers through the entire sales journey, the app must securely and seamlessly interact with multiple partner platforms and marketplaces and provide a fast and frictionless payment experience.
4. OPEN BANKING WILL TRANSFORM CREDIT RISK AND AFFORDABILITY CHECKS
Most BNPL providers only complete a very basic credit assessment, usually through a combination of soft credit checks and previous repayment history. This will change with impending regulatory oversight. In the UK, the Financial Conduct Authority (FCA) wants affordability to be fully aligned with credit risk checks. The challenge will be balancing the risk against the customer experience.
Payment fraud systems must have the ability to analyse data in real time and generate accurate credit risk predictions without sacrificing the merchant checkout experience. Enter Open Banking! Real-time access to customer data, predictive analytics, and decisioning software will enable BNPL providers to effectively assess consumers’ creditworthiness, while providing a frictionless customer experience.
BNPL providers should develop an Open Banking strategy and start building their platforms, partnering with third-party providers or making acquisitions in preparation for regulation. Open Banking will transform the way credit risk and affordability checks are done and enable BNPL lenders to make more accurate affordability and lending decisions.
Buy Now Pay Later is expanding across industries and competing with banks for revenue share, and the time is ripe for disruption. Banks and larger competitors, such as global merchants, entering the BNPL arena must carefully consider their market strategy and build compelling and scalable business models to stay competitive.
Key to this is an engaging, customer-friendly app and integrations with shopping carts and other partner platforms. For the big players, those entering the super app market early will gain a competitive advantage – and those that don’t will lose out.
All BNPL players must also be prepared to assess consumer affordability; for some, this will mean replacing legacy technology with real-time risk analytics and decisioning engines, using AI and machine learning. The use of Open Banking APIs will also be instrumental in providing a fast credit decision and seamless customer experience.
There are several industry trends and regulatory changes driving this disruption, but I think the four discussed will be significant in defining the next chapter of BNPL and its global impact on consumer protection, customer experience, and financial inclusion.
VP & Principal Industry Consultant, PaymentsAnnmarie is a Payments leader with 25+ years of experience in Payments, Banking, and Fintech. Passionate about payments innovation, she specialises in payments processing, solution delivery, and consultancy. With an MBA in business and expertise in technology, she is a trusted advisor to clients, who appreciate her ‘big picture’ view. Before joining Endava, Annmarie held senior technical and leadership roles at Visa and other global payment organisations, delivering innovative solutions for clients across Europe, the US, Asia Pacific, and the Middle East. Having lived in the UK, the US, the Caribbean, and travelled widely across Europe, she is truly a global citizen. When not working, Annmarie enjoys nature, walking, travelling, and spending time with family, while also making time for her mentoring work with university students in London.
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