Buying something today and paying it off later is not a new concept anymore. Today, the market is flooded with Buy Now, Pay Later (BNPL) providers like PayPal, Afterpay, Klarna, Affirm, and many more. Factors like the rising number of eCommerce platforms and their services, digitization, rising merchant adoption of BNPL, and increasing repeat usage among younger consumers triggered lending at point of sale, a service also known as BNPL expand its footprint fast.
Despite rising inflation and interest rates, consumer uptake of BNPL is still robust and most of the BNPL providers reported an increase in active consumers earlier this year. According to a recent study, almost 50% of US consumers said they have used a buy now, pay later service and the percentage of such BNPL service users is growing rapidly. With the increasing adoption of online payment methods, an increase in demand for delayed payments for online purchases, and a rise in spending among the adult population bought confidence among BNPL providers to partner with leading eCommerce platforms like Shopify, WooCommerce, BigCommerce, and many more.
Today, BNPL is part of the consumer buying experience. It’s crucial for both, the startups looking to launch a new BNPL service and existing BNPL FinTechs trying to expand, to understand the importance of technology for their success or failure in BNPL. According to a recent study, 67% of buy now pay later users said BNPL could replace their credit cards because of the ease at which the BNPL services give credit to people. Shifting the flow of money from big established financial institutions to newer FinTech companies excited policymakers and government regulators to show more interest in the BNPL to protect consumers and keep things under control during the economic downturn. Following are the key areas where technology can help you decide your success in BNPL:
BNPL providers can leverage technologies to gather sufficient data, online and in real-time, to confirm the identity and assess the affordability risks of the buyers via national databases. These advanced technological capabilities can help BNPL FinTechs perform real-time checks for ID verification, Know Your Client (KYC), Anti-money laundering (AML), credit history, and affordability checks to make digital lending and payments seamless.
Retailers have found offering both online and in-store BNPL payment options to be an ideal way to upsell to customers, increase both conversion rates & basket sizes, and achieve business goals fast. Delivering a successful BNPL payment option will inevitably depend on how well the retailer and the BNPL provider can streamline the customer sign-up process and ensure simple one-click checkouts. With advanced technologies, regulated BNPL FinTechs can ensure quick and seamless integration with retailers’ eCommerce sites to deliver a good customer experience.
Using advanced technologies can help BNPL FinTechs automate payment processing. Some of the BNPL FinTechs have their own payment processing solutions, while most of them regard it as an external process, and hence they integrate with existing payment processing solutions which dilutes their margins. Having your own automated payment processing capabilities not only gives you an advantage from a revenue perspective but also adds credibility and ensures the security of valuable consumer data for the users.
BNPL FinTechs can use advanced technologies to automate the full BNPL customer lifecycle, including transaction approvals, automated repayment reminders, interest and fee calculations, reconciliations, debt collection processes, failed and penalty payments, credit line management, allocation of payments and repayments, and more. This will allow BNPL FinTechs to cut down long-term costs associated with operations staff at the back office.
Even though banks have been offering POS financing for a long time, they have failed to upgrade their technology to deliver an improved and personalized customer experience. In a recent survey conducted by McKinsey, about 60% of users said they are likely to use POS financing over the next 12 months. The increase in the popularity of BNPL technology involves different sets of providers and models, each with unique strategies and value propositions. We have underlined a few BNPL business models to help you make sense of this industry and explore how POS financing providers are targeting the ecosystem to meet the needs of merchants and consumers.
BNPL technology has created a very high affinity and engagement among customers buying products from online channels. The BNPL FinTechs have identified various shopping categories with high spending volume and partnered with in-demand stores to offer the one-stop solution via super-apps. This enabled users to avail of credit services and use their credit to shop on the BNPL marketplace with their favorite brands. This is the most dominant model and it not only helps businesses improve customer experience but also boosts average order value (AOV) by lowering customer hesitation towards a form of credit, resulting in significant repeat usage, hence higher revenue.
This BNPL model is a more prevalent form of POS financing with credit cards which enable users to convert their regular purchases to 0% Annual Percentage Rate (APR) Installments. Such a model is applicable for high-ticket purchases with the added benefit of reward points or merchant-offered subsidies. Card-linked BNPL gives more control to users and offers flexibility to select merchant transactions they want to convert into installments before buying i.e. pre-purchase, at purchase, and post-purchase stages.
Unlike card-linked financing, this BNPL model offers credit with Installments for the first few months at a 0% APR and then follows a subsidized APR. BNPL FinTechs in this model target high-to-mid ticket size items with a low purchase frequency. These transactions usually require long tenure ranging from 6-12 months. The users of such type of BNPL service have a high credit score, hence a lower risk of default. The model is a perfect fit for businesses witnessing high cart abandonment rates and huge customer acquisition costs hence it is widespread across industries like furniture, fitness equipment, home improvement, travel, etc. This model helps businesses to promote the purchase of their products by offering cheaper credit or easier payment terms to users.
The rent-to-own model is enjoyed by users having low credit scores and works well where the item can be repossessed. In this case, even though the user has purchased the item, the ownership lies with the service provider. Once all the installments are completed by the user, a transfer of ownership happens. Such type of BNPL business model primarily targets the subprime user base and has a very high implied annual percentage rate (APR) for users, which means they don’t have 0% APR and carry a charge in the range of 1% to 5%. The model has great potential for the untapped market because within the US nearly 1 in 3 consumers have subprime credit.
The growing popularity of BNPL across small to mid-ticket-sized transactions with high-frequency purchases triggered FinTechs to offer BNPL financing for vertical-focused high-volume transactions as well. Such high-ticket transactions can range anywhere between US$ 2,000 to US$ 50,000 in the industries like green energy, healthcare, travel, automobile, and home improvement. These BNPL FinTechs focus on the partnership model with major operators/equipment manufacturers to achieve high volume and maintain a viable profit margin. While deploying this model, BNPL FinTechs work relentlessly on the go-to-market strategy and target markets of the businesses.
The need for banks, big retailers, and others to make strategic partnerships with BNPL FinTechs is rising to ensure they deliver an improved and personalized customer experience. But still, there is a huge market open for BNPL FinTechs, and tapping into these untapped segments will require faster market-ready implementation. LendFoundry’s expertise in leveraging cloud technology and microservices architecture helps FinTechs to achieve agility, scalability, and delivery of large-scale apps at speed. We have invested very significantly in Kubernetes, and other Cloud technologies to deliver a cloud-native, API-first, microservices-based digital lending technology platform for loan origination and servicing.
To learn more about our services and offerings and get the acceleration your FinTech business needs, please do connect with us.