Why BNPL is FinTech’s new favourite buzzword
By Robert Davis
17:00, 8 October 2021
Buy Now Pay Later (BNPL) has become FinTech’s new favourite buzzword as the holiday shopping season approaches.
Trailblazers in the sector told Capital.com that BNPL could disrupt the traditional credit card system. BNPL’s appeal is shared among companies ranging from start-ups to giant financial institutions looking for ways to adopt the programme into their services.
The FinTech space used to be headed by Sweden’s Klarna and Australia’s AfterPay but has recently included fast-growing companies such as Affirm, Sezzle and Zip.
Companies both large and small, from Mastercard and Amazon to everyday FinTech start-ups, are adopting BNPL features into their services. These programs often come with 0% interest rate loans, although some can be reported to credit agencies if the loans do carry interest.
Since 2018, the use of BNPL programs has increased 300%, according to a market study by AfterPay. Through 31 August of this year, more than 45 million global users have spent more than $20.8bn through BNPL channels, the study found.
It also estimates that service retailers in the US will gain an additional $1.6bn in surplus value from BNPL this year.
A solution that works
Paul Paradis, president of Sezzle, told Capital.com in an interview that BNPL is popular right now because it’s “a solution that works and there’s high demand from customers.”
BNPL options offer customers no-cost finances on their purchases and an easy way to build credit. Those who can afford to make instalment payments are essentially given free money from companies like Sezzle.
To pay for these services, Paradis said Sezzle shifts the cost onto merchants by charging between 5% and 6% in fees compared to the 2% or 3% fees charged by traditional credit card companies. However, merchants are willing to pay because companies like Sezzle offer daily batches of cash transfers, while other credit companies can hold funds for days after a purchase is made.
Sezzle makes approximately 80% of its revenue from merchant fees, Paradis said. The other 20% comes from consumer fees that arise in situations of late or non-payment, or when a customer wants to extend their instalment payment date.
Paradis added that the consumer fees are designed to “prevent bad consumer behaviour,” more so than to exact a profit.
“We believe the existing credit card system is broken. There needs to be another way for young consumers to build credit that isn’t as complicated,” Paradis said.
Flexible payment options
BNPL isn’t reserved solely for FinTech. Large companies like Mastercard and Visa are also adopting BNPL options to provide flexible payment options to their customers.
“We understand that consumer financing can happen during any stage of a shopping journey – pre, during or post transaction,” Sangita Bricker, senior vice president of Communications for Mastercard, told Capital.com.
Visa also recently expanded its “Installment Solutions” program in Australia by forming a partnership with financial institution ANZ and merchant payment processor Quest.
“There is overwhelming demand in Australia for BNPL financing through consumers’ existing, trusted financial institution,” Julian Potter, a manager at Visa, said in a statement.
Inherent risks
However, some consumer advocates say there are inherent risks of BNPL programmes that consumers need to beware of.
According to research from Consumer Reports, a non-profit consumer advocacy group, some of the risks include additional credit reporting, over-spending by consumers, and problems returning broken or defective items.
Other research shows that instalment payments can be hard for consumers to track as well. A survey by Cornerstone Advisors, a Scottsdale, Arizona-based banking consulting firm, found that 43% of people who use BNPL programs miss a payment.
“For most people having the money was not the problem—it was the management piece of it,” Ron Shevlin, director of research at Cornerstone Advisors, said in a statement.
Going forward
Market analysts see potential for significant growth in the BNPL space going forward. According to research from Grandview Research, the BNPL market is expected to climb in value to more than $20.4bn by 2028 at a compound annual growth rate of 22.8%.
At the same time, Cornerstone Advisors found that banks and credit unions are increasingly working with FinTech companies to expand their services and improve their efficiency. This could result in more banks and credit unions offering BNPL options in the future, according to the company’s survey.
For Paradis, the key to capitalising on this growth is focussing on scalability. He said Sezzle already has double the purchase frequency of some of its larger competitors like Affirm, a trend he expects to continue.
“We offer consumers a consumer-friendly way to increase their purchasing power. What’s not to like about that?” Paradis said.