Marc Beresford, director at Edgar, Dunn & Company (EDC): “EDC expects to see more innovation in the BNPL marketplace, both online and in-store, and one area where we will see new proposals will be merchant-led financing.”
“Pay Later” purchases typically meant an interest-free period after the purchase, during which no payment was made and no interest was charged. After this interest-free period, payment was expected in full – otherwise, interest would be added from the time of the original purchase. Today, the ‘Buy Now, Pay Later’ (BNPL) market has grown, and in Europe – according to Kaleido, the research firm – 30% of total e-commerce spending will go through BNPL by 2025.
The advantages of BNPL
BNPL has advantages for both buyers and traders. The growing importance of millennials in the digital economy and the growth of e-commerce during the pandemic has led to an acceleration in the adoption of BNPL. The main advantage for the buyer is the ability to bring the items home right away and pay later. The option of paying no interest if payments are made on time or if the full amount is repaid at the end of the loan period has undoubtedly appealed to consumers wishing to spread their payments over a few months. This payment method is also suitable for unforeseen or urgent purchases. Consumers with low incomes or who do not have a credit card may also find BNPL an attractive option.
Another benefit for consumers relates to returned items. A major fashion retailer once told me that up to 60% of their regular customers buy multiple pieces of the same garment in different sizes. When the consumer returns an item purchased through BNPL, they may need to arrange this directly with the retailer and in accordance with their returns policy – or some BNPL vendors may handle returns through their own branded app. As long as a return has not been processed by the merchant, the BNPL balance will not be adjusted.
The exact process varies by vendor; nonetheless, many consumers take the opportunity of “trying on items at home” to see if the clothes fit well before the first payment is processed. Amazon Wardrobe also offers a 7-day free trial option for its Prime customers.
Another benefit for consumers is that when they are having trouble making their refunds, some BNPL providers will offer a refund snooze option for up to ten days. Klarna offers this option but only once per order.
For the trader, BNPL lowers and removes any purchasing hesitations that the buyer may have. Impulse purchases are more likely to occur, and the average transaction value (ATV) is often higher. For traders, this will increase overall sales and can sometimes provide a new source of income from loan interest and late fees collected and shared by the BNPL provider. Financing buyers with a BNPL option means there is no need for a credit card that gives the merchant a smoother, branded customer payment experience.
Who are the BNPL providers?
All over the world there is a growing list of BNPL providers, such as Affirm, AfterPay, Ant Financial, Blispay, Bread, Bundll, ClearPay, CreditClick, Divido, EasyPay, Flava, Flexi (aka Humm), Fly Now Pay Later, Hoolah, Kiva, Klarna, Laybuy, OpenPay, PayL8r, PayPal, Sezdle, Splitit, Spotii, Tymit, Zilch and Zip. Even Mastercard and Visa have made strategic investments in the BNPL market.
Are there only advantages at BNPL?
The UK regulator of the Financial Conduct Authority (FCA) conducted a review of the BNPL market, published on February 2, 2021. It said BNPL transactions offered through fintech companies such as PayPal and Klarna must be covered by its rules “urgently”. because of a “significant potential of harm to the consumer”. In July 2020, Edgar, Dunn & Company (EDC) asked the question “Are we heading towards another consumer debt crisis following the COVID-19 pandemic?” “. In a pre-pandemic world, EDC has seen a growth in installment payments and BNPL payment options appear in a wide range of retail sectors, from fashion to airline tickets. There may be no interest or hidden charges on most transactions – on the other hand, most providers will charge a fee if a payment is late or a refund is missed.
At this time, it is unlikely that a consumer using BNPL would be subjected to a “hard” credit check that would leave an “imprint” on their credit report. However, costs are incurred only if the consumer does not reimburse on time. Some of these providers reserve the right to report defaults to credit bureaus such as Experian or Equifax. A consumer’s credit score can be affected, which could make it difficult for a customer to approve a personal loan or mortgage in the future.
Each BNPL provider sets a credit limit based on a consumer’s credit score, affordability, and proprietary algorithms, which means that one customer’s credit limit may differ from another. Therefore, the credit limit is set per vendor, not for all vendors. None of BNPL’s providers will know how much the consumer has borrowed elsewhere, meaning that the total debts of multiple providers can spiral out of control. BNPL is currently unregulated in many markets. Much of the burden falls on the consumer to keep the amount they borrow within affordable limits. The consumer must maintain his regular payments.
What is the future of BNPL?
There is no doubt that by early 2022, one year after the FCA’s review of the BNPL market, further regulatory controls will be in place in the UK which will include the affordability and systemic sustainability of the credit. BNPL providers will have to change the way they recruit consumers and monitor their line of credit across the market. This should have an impact on who can access BNPL and how much those who use it can borrow.
It is hard to believe that there is room for more BNPL providers to enter the market based on the aforementioned list. However, Edgar, Dunn & Company (EDC) believes there will be continued growth in the near term. EDC expects to see further innovation in the BNPL marketplace, both online and in store, and one area where we will see new proposals will be merchant-led financing. The huge growth in cashless payments, including BNPL, presents a huge opportunity for fintech companies operating in the digital payment ecosystem. It is expected that more providers with more consumer proposals will be launched.
This article is part of the 2021 Payment Methods Report – Latest Trends in Payment Preferences, a comprehensive overview of the payment methods being considered for 2021, as well as best practices for optimizing payment and converting customers to addressing digital transformation, security and localization.
About Mark Beresford
Mark Beresford is a Director at Edgar, Dunn & Company (EDC) and has over 25 years of strategic consulting experience in the payments industry. He is responsible for the business practice in collaboration with omnichannel merchants and payment service providers around the world.
About Edgar, Dunn & Company
Edgar, Dunn & Company (EDC) is an independent global payments consulting firm. The company is widely regarded as a trusted advisor, offering a full range of strategy consulting, expertise and market analysis services. EDC’s expertise includes M&A due diligence, legal and regulatory support, fintech, mobile payments, the digitization of retail financial services and e-commerce.