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‘’In recent years, several marked shifts have emerged- the e-commerce boom, the rise of the fintech industry, the growth of digital payments, and the newest being the traction towards Buy Now Pay Later. Many of these trends have influenced shopping behaviour, accelerated online purchases, reduced cash transactions and prioritized instant gratification with deferred payment options. The astronomical valuations of certain global BNPL players and the foray of multiple players into this segment, including banks and large financial institutions, clearly indicate the huge growth potential of the BNPL space and also serve as a warning sign to peer online credit-backed payment alternatives to reinvent themselves.’’
BNPL: Cashing in on the digital opportunity
A study by Kaleido Intelligence confirms the jump in e-commerce transactions and surge in BNPL usage. As per estimates, by 2025, $731 billion worth of transactions would be spent via the electronic point of sale finance. The BNPL spending mode through e-commerce would spiral from $89Bn in 2020 to $352 Bn in 2025.
Source: Kaleido Intelligence
Rise of one-stop financial powerhouses
The demarcation lines between fintech, banks, and financial institutions are gradually getting blurred. With an ever-increasing focus on consumer convenience, the industry is moving towards the emergence of the concept of financial powerhouses i.e. an entity that offers all financial services under a single roof- digital payments, banking products like digital accounts, loans, insurance, investment advisory, and beyond.
An S&P study indicates that well-funded BNPL players with adequate financial firepower and brand-equity might foray into other financial services like lending, wealth management, etc, traditionally offered by banks and large financial institutions, resulting in higher competition. A global BNPL player already owns a full banking license in one European country with plans to launch into other European markets targeting the savings space through strategic tie-ups with local online deposit marketplaces. Visa and Mastercard have entered the BNPL space through the launch of Visa Installments and Mastercard’s strategic acquisition of Vyze and an alliance with Splitit respectively.
Not to be left behind in the digital race, banks like Citigroup and JP Morgan Chase have launched Citi Flex Pay and My Chase Plan respectively which allow customers to phase out their payments towards big-ticket purchases for a fee, being linked to credit cards.
All the credit goes to BNPL
The key findings from Australia ASIC’s survey were that 33% of respondents used purely BNPL without reliance on any other credit vehicle. A study indicates the preference for deferred payment as below:
The winning features cited were the enhanced cash flow position of the user at no additional costs, along with a prompt experience at the time of checkout, citing convenience and easy credit accessibility as key influencing factors. Finder research opines that in a survey conducted in July 2020, 44% of buyers opted for BNPL due to its convenience factor. The BNPL registration process is relatively seamless compared to other alternatives, with mere one-click credit finance, without the need to follow tedious procedures and formalities to avail credit through other channels. Upon completion of online account creation, the buyer can avail instant approvals of bills from multiple merchant platforms up to a pre-determined credit limit.
As per a report by Coherent Market Insights, the fashion and garment industry commanded the highest market share of 52.2% among BNPL end-users in value terms in 2019.
Additionally, many buyers believed that they were able to afford higher-priced, expensive products by adopting BNPL as a payment mode. As a result, merchants and online retailers would be able to close higher sales through BNPL. In the case of other credit avenues, buyers might have curtailed their purchases owing to credit limits or insufficient funds.
Reimagining an existing concept
While 0% financing has been around for quite a while now, BNPL backed by technology-driven data analytics and insights-driven credit decisions has made the concept quite popular. Another study indicates that BNPL is expected to touch 3% of the global e-commerce spending by 2023, supported by a 39% CAGR witnessed by leading, global BNPL players.
As per media reports, a global BNPL player touched a record-high customer base of over 11 Mn in the US alone, registering a 106% y-o-y growth. The critical factor remains robust underwriting practices and accurate credit risk assessment. Other media reports indicate that during the first 9 months of 2020, a leading global BNPL player saw a steep 35 % increase in credit losses.
Interest-free credit period: the Big draw
BNPL is often compared with credit cards. However, a key benefit of BNPL is the interest-free period with the facility to pay in installments in certain cases, without the steep annual charges associated with credit cards. Studies indicate that in the US and Europe, only a third of millennials possess a credit card. Further, a study by Australia’s ASIC reveals that 60% of BNPL users comprised those aged between 18-34 years. The flexible pay option appeals to agile consumers belonging to the millennials and Gen Z demographics, familiar with digital technology, being internet-savvy, and possessing mobile phones.
An S&P report summarizes the global BNPL model in a nutshell. The BNPL companies generally charge the merchant a fee for the service, while the financing is free for the end-consumer. In return, the merchant is promised a 20% -30% boost to sales.
Emerging Revenue models
Broadly, the revenue channels for BNPL comprise merchant fees, interest, late fees, and in certain cases an upfront fee. BNPL players too are positioning themselves to differentiate their offerings with terms being used to describe their services as a revolving credit line to a budgeting tool.
Merchants associated with BNPL are generally required to pay a fixed fee in the range of 4-6% of the sales price. The benefits are evident through higher sales volumes and loyal customers. According to Global Payments Report 2020 by Worldpay, the expected growth in BNPL transactions volume is a whopping 54%.
A certain global bank turned BNPL player has specialized into a consumer-first model. Armed with detailed data about consumer purchase patterns and transaction history, the company has avoided merchant partnerships and instead charges a nominal upfront fee to each customer instead of the hierarchy of charges associated with credit cards.
Certain other global BNPL players charge for each missed payment and a penalty amount of the installment remains overdue for a week. Users who miss all installments would be charged late fees. Some platforms even charge users on unpaid balances every month.
Another emerging business model within the BNPL landscape is whereby the BNPL company directly markets to end-customers through an app and a bank card. The app provides access to products and special offers available on affiliated merchant sites. This saves the merchants the trouble of acquiring end-customers. The merchants only need to integrate BNPL as a payment offering.
The disruption by the BNPL sector also serves as a wake-up call to incumbent players solely offering traditional credit purchase options like credit cards and online financing offerings. A Forbes study reveals that 42% of Gen Z and 69% of Millennial users would be keen to opt for BNPL services if they were offered an opportunity.
Simpl is at the forefront of the fintech revolution in India. Through our innovative BNPL offerings and affordable pricing, we aim to catalyze and simplify the payments domain for end-customers and merchants alike.