Understanding Global BNPL Business Models – Part 2
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Continuing with our series on the popular BNPL business models, we looked at the super-app variant in the previous article, where the merchant sites may be visited via the fintech’s app. This enables merchants to highlight special offers and engage in product cross-selling.
Also, we saw how BNPL players, with their agile strategies and innovative product offerings, are giving banks a run for their money especially in the unsecured products consumer lending space. We shall look at the other BNPL mechanisms that are prevalent in the global scenario.
In the previous article, we looked at integrated shopping apps under the BNPL segments. In this article, we shall understand the following BNPL business models:
• Card-linked instalment offerings
• Off-card financing solutions
• Virtual rent-to-own model
• Vertical focused larger ticket plays
• Sales financing
Card-linked instalment offerings
These provide the option to use credit cards with zero cost EMI as a form of point-of-sale financing. Often used to fund high-ticket purchases of over $1000.
A McKinsey survey pegs the growth at 200-300% CAGR, being popular in Asia and Latin America.
• Given its 0% APR at the time of checkout, this mode has seen higher adoption levels than credit card offerings of reputed global banks, with instalment payment plans after the purchase.
• Leading BNPL players have rolled out innovative credit card-linked instalment purchases with flexible EMI conversions.
How it works:
BNPL players offer card-linked instalments towards purchases. Other alternatives include network-offered solutions or co-branded cards with specific merchant partnerships
• Scope for merchant-subsidized offers: Prior to the buying decision, card issuing companies can offer customers the option to select which merchant transactions need to be converted into an instalment repayment route. Further, this is undertaken through popular offer websites of card issuers.
• Robust Differentiation strategy: Opportunities to engage with the consumer throughout the journey- pre-purchase as well as post-purchase aimed at higher monetization.
Off-card financing solutions
• McKinsey estimates that this vertical is growing at 80-100% CAGR with use cases largely being electronics, furniture, home goods, sports and home fitness equipment, and travel.
• The credit amounts are mid-value (between $250 and $3,000) to high ticket purchases with low frequency. BNPL players offer financing, spread across monthly instalment repayments over an average of 8-9 months.
• Broadly, close to 80% of these customers have high credit scores and own a credit card. The reason they opt for BNPL is because of it being a lower-cost credit option with flexible repayment options.
• Merchants prefer this route in cases where customer acquisition costs are high with multiple instances (90%) of cart abandonment.
• Instances where the customers bear the cost of an APR, which may be subsidized by merchants include low-margin domains like travel.
• A healthy mix between digital and physical store driven solutions. In 2021, 25-30% of originations are expected to be from in-store financing.
• Increased adoption is being witnessed by customers with high credit scores, especially high ticket purchases. A study reveals that over 65% of credit origination volumes are from prime or higher. As a result, this model is eating into the share(by volume) of credit cards.
• Given that the purchases tend to be high-value and low-frequency, customers displayed repeat usage of 2-3 times each year with relatively lower levels of engagement compared to 20 times in the integrated app option. The commoditization risk persists in this model.
How it works:
• This model adopts a dual Annual Percentage Rate (APR) mechanism i.e. customers need to pay 0% APR for a certain tenure and then a subsidized APR for the balance period.
• Traditional players are partnering with new-age agile BNPL players to capture a higher share of the unsecured lending portfolio.
Virtual rent-to-own model
Under this model, a financial arrangement is worked out by which consumers make payments towards their preferred goods. Once all the payments are completed, the ownership is transferred to the customer.
• The most common goods purchased i.e. 80% of the end-use is towards home appliances, furniture and electronics, and similar goods where ownership may be transferred.
• McKinsey estimates that this segment is growing at 30-35% CAGR
• Generally, VRTO targets customers who have a ‘not so healthy’ credit score (95% – below 700 and 70% – below 600 in certain cases)
How it works
• The credit checks are minimal with almost instant approval, low deposit requirements and flexible repayment options. Often merchants maintain the standard APR for such customers, without any subsidy.
• Phygital route: Certain leading VRTO players have rolled out integrated in-store and online stores to function as 2nd and 3rd level financiers
• Credit expansion: Lenders can explore expanding their credit suite to also include sub-prime customer-specific products.
Vertical focused larger ticket plays
Under this, purchases of high financial value to the tune of $2000-$50000 are financed.
• McKinsey estimates that this vertical is growing at a robust 10-15% CAGR with prominent buys being home improvement namely solar panelling, heating, ventilation, roofing, air conditioning (HVAC) etc, power sports equipment, healthcare products in tertiary care like dermatology, cardiology etc.
• Since the credit is for high-value purchases, certain lenders have chosen to opt for specialization by product categories.
• Players keen to achieve scale and better manage margins, partner with original equipment manufacturers (OEMs).
• Home improvement financing is increasingly eating into the share of home loans and personal loans provided by banks.
How it works:
• Since the credit amount is high and being a competitive space, BNPL players need to study which categories to choose along with ways to engage with the end-consumer.
• Banks can deploy this route to acquire new customers who require high-value credit and cross-sell home loans, equipment finance etc.
SME sales financing
For SMEs and small business entities that are conserving capital, SME sales financing offers a deferred payments system. SMEs can avail of a prescribed interest-free credit period towards repayment in easy instalments.
• Certain BNPL players have enabled SMEs to avail instalment repayment for 100% of transactions at the time of checkout. This is facilitated through smooth integration of the BNPL mode with the internal expense software in a centralized manner. Over time, the lenders get insights into the kind of purchases, average purchase value, risk metrics and repayment capability.
How it works:
• The instant credit is generally structured as off-card payments under this model. SMEs may use the credit facility towards purchases of business assets with customized financing options and flexible leasing.
• Benefits for multiple stakeholders: SMEs are able to gain from lower-cost credit, while fintechs are able to increase loan sanction volumes while mitigating risk.
As the lending industry matures with the emergence of multiple unsecured credit variants and accelerated innovation in the BNPL space, we can expect to see enhanced collaboration and partnerships between traditional lenders and BNPL players in the coming days. This would result in new BNPL business models emerging.