Understanding Global BNPL Business Models – Part 1


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Popularly referred to as Point of sale financing or checkout financing, Buy Now Pay Later is emerging as formidable competition for other existing digital payment modes. 

Key factors fueling the surge in popularity especially in the post-COVID digital era are the preference for instant credit to fund purchases, postponement of repayment encouraging repeat use by young-aged customers and increased merchant adoption. We take a glimpse into the prevalent BNPL business models seen globally and further explore factors behind their rise.


Prevalent BNPL Business models Globally

We shall look at the BNPL business models that are in vogue globally and currently deployed by the incumbents:

  • Integrated shopping apps
  • Card-linked instalment offerings
  • Off-card financing solutions
  • Virtual rent-to-own model
  • Vertical focused larger ticket plays
  • SME sales financing

 

1. Integrated shopping apps

This is prevalent in the global scenario where leading BNPL players are developing a one-stop shopping platform with in-built BNPL as a credit solution for customer purchases. The big players offer a complete shopping experience from the pre-buying stage to the transaction completion-payment stage.

 

• Trends

› A McKinsey study reveals that in 2020 this model clocked an impressive 300-400% growth This performance is expected to continue and deliver $4-6 Bn revenues by 2023. The key categories that saw maximum traction were discretionary expenditure categories like clothing, fitness and beauty which traditionally command higher margins. 

› Here BNPL moves beyond a payments product and aims to position itself as a full shopping partner. Steps include engaging with the customer, recommending products based on popularity and quality, providing credit options with a limited 0% interest period or EMI based repayment options. 

 

• How it works

 The BNPL players have built a super-app. Rather than virtually visiting multiple merchant sites, the customers simply log into the BNPL player app and can browse, shop, select and pay for their desired goods. 

 

• Advantages

› Brand equity: This model results in a huge boost to brand-building that the BNPL players are able to enjoy. Globally this model has translated into high conversions, reduced cart abandonments and in many cases, even high-ticket purchases with high frequency.  The BNPL players can strengthen their brand image as holistic e-commerce participants rather than simply a credit product. 

› Constant customer engagement: This model enables engaging with the customer throughout. Think of it as a digital marketplace that caters to all kinds of customers- low and high-value items, low and high credit scores and diverse product categories. The customers log into the app and then based on their choice are taken to the specific merchant app. 

› Higher monetization opportunity: Owing to multiple channels for engagement, there is scope for loyalty and rewards and alternative credit options i.e. multiple instalments, festive offers etc 

› Higher technology capabilities: The BNPL player needs to have the requisite tech skills to integrate the inventory system of each of the merchants, to avoid a situation of overselling. Further, the credit underwriting and anti-fraud mechanism need to be robust with proper legal arrangements with merchants in case of any disputes.

 

BNPL emerges as a winner amongst unsecured credit options

Amongst unsecured lending options available to consumers, a McKinsey study reveals that point of sale financing would take a clear lead in terms of growth metrics as follows:

CAGR % between 2020-2023:

  • Point of sale financing: 18-20%
  • Personal loans: 8-10%
  • Private label credit cards: -2%
  • General-purpose credit cards: 5-6%

From the above stats, it is evident that compared to banks (key offerings: cards), fintechs have made the most of the digital traction. McKinsey’s study indicates that banks are losing to fintechs in the BNPL game. It is estimated that banks have suffered a potential revenue erosion to the tune of $8-10Bn annually in the consumer lending space. 

BNPL payment mode may be made in the following ways:

• Split pay – As the name suggests, the repayment may be done in more than one instalment

• Pay later: This is the standard BNPL where the cumulative bill from multiple, merchants may be settled at one go with an interest-free credit period

• Long-term financing at 0% Annual Percentage Rate (APR)

• Long-term financing with subsidized interest or fee

 

Customer Profiling

Another trend was that the adoption of PoS financing was not restricted to customers with a low credit score. McKinsey’s survey reveals that, with premium merchants offering PoS financing, 65% of the credit-backed purchases were by customers with credit scores exceeding 700. 

The option of splitting repayments was generally popular amongst customers with a lower credit score. Plus, the lower credit score was not solely owing to defaults in the past, it was also due to availing less credit. 

This, in a way, signals the coming of age of the PoS financing space, especially BNPL, which is finding greater acceptance amongst customers and merchants. And why not, given the below benefits for both parties to the transaction. 

 

BNPL Business Models: A clear win-win situation

Consumers:

The PoS financing method is proving to be beneficial to both the customers as well as the merchants. With a preference for instant gratification, consumers are able to purchase goods on credit without an upfront cash outflow. 

BNPL creates a level playing field enabling customers with lower purchasing power or not-so-good credit scores to buy from affiliated e-retailers at 0% or subsidized interest rates for a specific period of time with instalment repayment options. Plus often merchants extend subsidies and cashback which translates into huge discounts for the customers.  

 

Merchants: 

Merchants are able to benefit from higher customer loyalty, reduced instances of cart abandonment, higher-order value and attract a younger demographic pool as customers. BNPL also functions as a marketing platform for affiliated merchants and helps merchants onboard new customers including those inclined to impulse buying. 

 

Fintechs:

The BNPL players earn revenue from merchant fees and late fees, in case of delays in customer payments. Generally, the fintechs’ Merchant Discount Rate (MDR) is more than that for credit card/debit card issuers. However, since BNPL brings higher conversions and higher Gross Merchandise Value (GMV), merchants prefer to offer BNPL to their select, loyal customers. 

McKinsey’s POS Financing Merchant Survey of over 200 merchants reveals that merchants accord the highest priority to new customer acquisition which brings a higher probability of cart conversions.  

 

Concluding thoughts on BNPL Business Models

In the global scenario, BNPL is a highly competitive segment with intense competition to onboard a higher number of merchants. Thus incumbents are dependent on the price structure offered by merchants and in return the marketing support given to merchants. 

For example, a certain percent of the value of the transaction is paid to the BNPL player when the customer visits the merchant site via the super app. In the next article, we shall look at the other existing BNPL business models. 


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