BNPL In Banking
BNPL prime lending “locks out” consumers
BNPL prime lending “locks out” consumers
BNPL (buy now, pay later) facility by the banking sector is becoming increasingly popular. With the rise of economic development, the need for instant, and omnichannel payment options. However, currently, BNPL only welcomes the customer with high credit ratings, as a result, a lot of people are locked out of the BNPL trend. This suggests that a substantial percentage of potential clients have an unpleasant payment experience and leave the sale. For instance, BNPL credit approval decline rates are shockingly high. In certain circumstances, up to 70%, depending on population and sector. Moreover, around 40% of US consumers who utilized BNPL missed more than one payment, and 72% saw their credit score drop. The demand for high credit scores has prohibited merchants from attracting more business from consumers who do not match the criteria. The BNPL providers have to broaden the spectrum of lending and not just stick to prime lending to solve these issues. This way merchants can sell to more consumers and a high share of the population will be able to leverage the facility. BNPL in banking is a form of financing known as buy now, pay later, which enables customers to make purchases first and pay for them later. Unlike standard credit cards or personal loans, buy now, pay later options frequently don't come with heavy interest rates and are easier to get approval for. However, they have a fixed repayment schedule that is usually a few weeks or months long.
In the traditional banking model, consumers would typically use credit cards to make purchases, and then pay off the balance over time with interest charges. The consumer can split their payments into smaller, interest-free installments that are usually due every two weeks. While the idea of paying in installments is not a novel concept, what’s astonishing is how technologies such as open APIs, cloud, and artificial intelligence are adding a new layer of speed, scalability, and agility to consumer financial platforms such as BNPL. BNPL is a convenient payment option for consumers. It is a hit with the tech-savvy Millennials and Gen Z population as it is a low-commitment, budget-friendly, and user-friendly alternative to credit cards. BNPL solutions are especially helpful during economic uncertainties, like when inflation is sky-high or when interest rates hit the roof. Like any fintech service, buy now, pay later comes with its own set of pros and cons. Moreover, there are various risks associated with BNPL, including merchant fraud risk, merchant default risk, customer default risk, cyber and fraud risk, default fraudulent charge back, market risk, and interest rate risk.
There are various third-party providers of BNPL services, such as Klarna, Afterpay, and Affirm, they are also preferred over traditional banks. While BNPL can provide a more flexible payment option for consumers, it is crucial to not miss any payments or to pay off any balance, else it results in fees and damage to users’ credit scores. Banks are integrating BNPL services into their mobile banking apps, making it easier for customers to leverage these services, without approaching a separate service provider. However, there is certain criteria that the customer needs to fulfill to avail Buy Now Pay Later facility. These criteria are:
It has been estimated that around 350 million people currently use BNPL, which is expected to triple to almost 950 million by the end of the year 2027. The market is projected to grow at a CAGR of approximately 24% from around 6 Billion in 2022 to nearly 35 Billion in 2035. The industry is expanding as a result of factors like digitization, rising merchant adoption, repeated usage among younger consumers, and the entry of new firms offering BNPL services for lending. Customers are utilizing BNPL services throughout the world to avoid paying credit card interest, make easy impulsive purchase decisions, and borrow money without affecting their credit scores. Another factor is the growth of Online banking, being driven by the increasing use of mobile apps for payment transfers. Additionally, the rapid expansion of the e-commerce industry has aided fintech firms in expanding their global footprints through BNPL solutions. This growth trajectory is making incumbents and startups pay close attention to the rising popularity of BNPL and take the necessary action to improve the customer digital experience. Consumers are always looking for a satisfying checkout experience, with nine in ten customers agreeing that a better point-of-sale experience affects their decision to make a repeat purchase. BNPL allows a frictionless checkout in-store and online. It also cuts short in-store wait times, which have become a major headache for 91% of retailers and 85% of consumers. Thus, BNPL increases customer loyalty and helps retailers grow and stay competitive. However, debit and credit cards are still the most popular and preferred payment choices, but digital wallets and BNPL are slowly gaining traction across the globe.
More banks are moving in the BNPL market through partnerships, acquisitions, or by panning in-house solutions. Banks, such as Monzo, Revolut, Barclays, and Santander have already entered the market.
Monzo announced the launch of Flex Product, in which long installment plans of 6 or 12 months is likely to attract an interest rate of 19% but the first 3 installments will be absolutely free. In addition, Santander rolled out their BNPL product Zinia in Germany in 2021 and is planning to expand to other countries. Apart from this, the banking sector is also leveraging fintech-as-a-service to improve its products.
European Union implemented consumer credit rules for protecting the consumer. There have been requests to outlaw the unsolicited offer of credit or the unilateral raising of a consumer's overdraft or credit card limit. Moreover, credit information must be presented clearly so that customers know precisely what they are getting into. Furthermore, The Australian Finance Industry Association (AFIA) notified on March 1, 2021, the implementation of its Code of Practice for the BNPL sector. The Australian Financial Complaints Authority is going to handle BNPL issues under the code, and a designated committee will have the authority to publicly condemn corporations that provide lending services that violate the Code's requirements.
The BNPL payment option is one of the most intriguing trends to emerge in the context of the rapid use of e-commerce platforms. In India, Buy Now, Pay Later (BNPL) purchases would account for 14% of the total transaction value for e-commerce enterprises by 2026, up from 3% in 2021.
Having crypto as a payment option within the BNPL system would be ideal for the younger generation, particularly those who prefer not to use credit cards and are more comfortable with digital currencies as payment options. Cryptocurrency banking in BNPL can offer higher privacy and security
A huge economy like India with people from all walks of life spread across rural and urban areas can reap great benefits from implementing digital banking solutions like BNPL. In contrast to traditional credit, BNPL loans are mostly used for online shopping and utility bill payments. According to a survey, more than 20% of Indian consumers are likely to use 'Buy Now Pay Later' Services in the coming months. Many online retailers and fintech firms in India are providing BNPL options to customers as a practical payment option and a great replacement for credit cards. The Indian fintech company, CRED recently launched a buy now pay later service with its Cred flash, which allows customers to make payments using the CRED app. More than 500 partner merchants such as Swiggy, Zepto, and Urban Company offer this service and allow repayments within 30 days at no charge.
The Indian Railways Catering and Tourism Corporation (IRCTC) has teamed up with CASHe to offer a Travel Now Pay Later (TNPL) option to its passengers through IRCTC Rail Connect, its travel app. Customers can make their payments using affordable EMIs over 3 to 6 months after booking the tickets. In the US, the total value of BNPL purchases is expected to grow from around USD 74 billion in 2022 to more than USD 145 billion in 2026 with a CAGR of nearly 16.8%. Europe's BNPL payment market has had rapid growth over the past year, helped by the rising e-commerce adoption. BNPL is growing in popularity among consumers owing to its accessibility and convenience. The region's leading BNPL service providers include Klarna, PayPal Credit, and Splitit. Compared to other European nations like Italy or Germany, the United Kingdom has a higher acceptance of BNPL by both businesses and individuals.
With the growing demand for e-commerce services owing to lockdowns and consumer preference for breaking down large expenses into smaller chunks of interest-free EMIs, BNPL has become a go-to solution for many. Integrating Buy Now, Pay Later option into a business can be advantageous for companies who want to stay on the cutting edge and cater to a shifting client base. To remain competitive, banks and other bigger players, such as international merchants, entering the BNPL sphere have to carefully evaluate their market strategy and develop attractive and scalable business models. Moreover, customer affordability should also be considered by all the BNPL stakeholders. This might lead to replacing outdated technology with real-time risk analytics and decisioning engines powered by AI and machine learning. The adoption of Open Banking APIs will additionally assist to provide a quick decision regarding credit and a seamless user experience.
