The market for BNPL (Buy Now, Pay Later) services is already estimated at $100 billion, and by 2030 this amount could grow to $4 trillion — that is, by as much as 45%. Of course, such popularity cannot go unnoticed: this is where open banking comes into play — these services regulate transactions.
According to The Guardian data from the British financial regulator FCA, 75% of BNPL users are women, 25% of them are aged 18–24 years, 90% of transactions are for clothes. The volume of the BNPL sector in the UK is 2.7 billion pounds, the target audience during the lockdown in 2020 is 5 million people.
The concept of BNPL (Buy Now, Pay Later) is very simple: you make a purchase, pay 20–30% of the cost of the goods, and pay the rest in equal installments over a certain period of time. The store receives the full amount through the BNPL services. With its ease of use and high approval rate, the BNPL services have become almost a must for online marketplaces.
Treating BNPL services as something superficial can backfire on customers’ credit scores. So, for example, if customers miss payments or accumulate a lot of contracts, then initially zero interest will suddenly increase, and the credit rating will deteriorate.
BNPL services offer two solutions:
- Dividing payments into small amounts that need to be repaid in a short period of time (for example, weeks);
- Installment of a larger amount over a long period of time (for example, months).
BNPL is important not only for the trading industry — fintech players are looking to introduce this lending model to other areas, such as healthcare, travel and rental. Yet, to both control and perform BNPL services, open banking is needed.
As e-commerce grows, BNPL (Buy Now, Pay Later) services are becoming more and more in demand from online stores and their customers. BNPL is seen as a service that is more profitable, convenient and transparent for customers than conventional credit cards or other types of purchase financing offered in stores.
The largest retailers are interested in providing a BNPL services to their customers because the integration of this payment method increases the average cart, conversion, and repeat purchases. This is confirmed by transactions between global e-commerce giants and fintech companies providing the Buy Now Pay Later solutions. For example, in August 2021, Amazon and the leading BNPL player, the American company Affirm, became partners. Earlier, Square, one of the largest payment solution companies for online stores, announced plans to acquire Australia’s Afterpay to provide all stores with a BNPL solution.
The main users of BNPL services are millennials and Generation Z. These are consumers who especially appreciate the benefits and accessibility of BNPL. They do not use credit cards much and generally do not trust traditional banking services. Paying for goods in parts with the Buy Now Pay Later services gives customers the opportunity to immediately get what they need at the moment, often of higher quality or in larger quantities.
The most important advantages of the BNPL service for retailers:
- Reducing the number of abandoned carts and increasing conversions. The Buy Now Pay Later service is integrated into the customer journey in the store and thus the buyer instantly gets access to the amount that is needed to purchase a product or receive a service. When paying with Buy Now Pay Later, the buyer can choose a convenient payment schedule for the purchase, and, as a rule, without interest or with a small commission. All this reduces the number of abandoned carts and turns visitors into buyers.
- Increasing the average check and increasing sales. Lack of funds at the moment is one of the most common reasons for abandoning a purchase. If the online store offers to pay for the goods in installments, then the chances that a person will make a purchase increase significantly. According to official surveys, the average BNPL purchase is 2–3 times more productive than the average store purchase.
- Higher lifetime customer value (LTV). The use of BNPL services helps to increase the income associated with all future purchases of each client. A positive experience of purchasing the right product on attractive terms can turn a customer into the regular one.
- Reducing the number of returns of goods and increasing working capital. If the consumer choses BNPL as a payment method when placing an order, the BNPL service pays the store immediately after the goods are shipped. This is exactly how BNPL allows the merchant to receive funds more quickly instead of waiting for the goods to be delivered and the payment on delivery. Moreover, consumers purchasing an item with BNPL are less likely to return it upon delivery. This is facilitated by a small monthly payment instead of a total sum payment.
Thus, during the pandemic, consumers have adopted new habits, and retailers have gained new opportunities. The trends that emerged since 2020 will continue in the post-pandemic world. To fully develop in the field of e-commerce, companies must explore and use all available innovative solutions and tools that are convenient and beneficial for both consumers and retailers.
BNPL provides a high conversion of purchases, and also allows you to shorten the steps that customers take on the way to what they want. Open banking, in its turn, helps to obtain information about the user: the payment system connects to the bank via API and collects transaction statistics, confirms the presence of assets and stable income. Thus, the risks are reduced to a minimum, and the loan is approved quickly and accurately — without the need to connect to credit bureaus.
However, as BNPL service providers perform “soft” consumer credit checks, the system cannot accurately assess whether a customer is able to afford a purchase. Nevertheless, in open banking there are the same restrictions as in classic lending. On the other hand, open banking can improve the user experience — they can get an objective assessment of their credit score and approval in seconds — all thanks to the right set of analytics. Open banking turns vague and potentially misleading analysis into accurate and relevant.