The growth of buy now, pay later (BNPL)

Buy Now Pay Later (BNPL) is an understated but major theme driving payments innovation today. Quite simply, BNPL speaks to the need to disrupt and for traditional payment providers to ensure they are satisfying customers’ needs.

At its core, BNPL is a form of mini credit and gives greater flexibility to consumers in how they make purchases. This bridges the gaps in their accounts and opens up the possibilities of what they can execute in terms of transactions. Not only have changing consumer behaviours driven this, but technological innovations have also played a key role. In the same way mobile payments and contactless have transformed consumer expectations, now BNPL is doing the same.

BNPL today

BNPL gives consumers greater flexibility and unlocks new transactions. For these reasons, it’s no wonder that there has been a surging growth in BNPL services. In 2022, 360 million people were using BNPL services worldwide. This is now forecast to surpass 900 million by 2027, representing growth of 157%!

This is accelerating disruption in financial services and firms throughout the payments industry have reconfigured their offerings to cater for BNPL.  In recent years, this has become particularly useful due to rising inflation around the world. People’s purchasing power is being stretched and a need for extra flexibility has helped drive BNPL adoption rates.  

Here are some of the top BNPL providers:

1. Afterpay
   Based in: Australia
   Customers: Over 20 million
   https://www.afterpay.com/en-US/for-retailers
   
   

2. Klarna
   Based in: Sweden
   Customers: Over 85 million
   https://www.klarna.com/uk/
    

3. Affirm
   Based in: USA
   Customers: Over 50 million
   https://www.affirm.com/
   
   

4. Latitude
   Based in: Australia
   Customers: Over 14 million
   https://www.latitudefinancial.com.au/
   
   

5. Tabby
   Based in: Dubai
   Customers: Over 12 million
   https://tabby.ai/en-AE

The benefits are clear for consumers. This gives them much greater flexibility to make purchases, and means they are not held back by arbitrary salary payment dates or when other payments are made to their accounts. Many BNPL products also work with 0% financing, which can be another draw to the service and allows users to further split up payments. Here, there are also clear advantages for those on the fringes of financial services whose finances aren’t always a ‘neat’ fit for contemporary payments. BNPL for underbanked consumers can be a significant advantage and go a long way to improving financial inclusion.

There are also many BNPL benefits for retailers. By offering BNPL in retail, they can allow transactions to be facilitated and still gain revenue – especially in the days or weeks prior to payday when retail activity notoriously slows down. With the right marketing strategy, BNPL can be an effective tool for customer acquisition. With retailers also feeling the pinch of high inflation, innovative use of BNPL can help them access new customers – especially those who expect this flexibility as standard. Here, marketing BNPL services to millennials and Gen Z can be highly effective.

Of course, there are risks as well. Given BNPL is technically a form of micro credit, there is a risk of consumers not paying. This puts an onus on credit checks and users of BNPL services need to be offered support and backup routes should they fail to make repayments. Additionally, these BNPL services will often come with fees, and these can quickly add up. Some customers, in a hurry to execute transactions, can sign up to BNPL providers without checking fee rates – meaning there is a danger of stealth fees, especially when very small but frequent transactions are involved.

What is needed to make BNPL work

BNPL can be a fantastic element of payments, but it needs to be done properly. Some BNPL providers have been able to carve out market share through not having credit checks, thus minimising onboarding friction, but some elements of credit control are advised. Short questionnaires, innovative use of APIs and ongoing analysis of transaction data can all be used to keep a BNPL provider updated as to customers and their ongoing credit capacity.

At the heart of this, strong compliance controls and best-in-class technology are vital – not only to allow BNPL to be as reactive and flexible as it’s intended to be, but also to allow BNPL providers to be efficient for the sake of customer financial safety.

BNPL presents a new era in payments and a further extension of how fintech is changing financial services to better reflect the changing behaviours of the population. This can present risks, such as BNPL defaults and compounding stealth fees, but these can be mitigated through strong technology and responsible governance from the payment provider. Once safeguards are put in place, a strong BNPL offering can really help payments providers go above and beyond in how they support their customers.

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