Credit to individuals: can the BNPL still operate after the pandemic?

Although not an entirely new concept, BNPL has seen a surge during the pandemic.

Teodor Blidarus, CEO and co-founder of FintechOS, questions whether buy now, pay later (BNPL) can remain a largely viable retail lending approach post-pandemic

BNPL is a hot topic for financial services. The lockdown has led to a surge in online sales and BNPL is taking market share as a digital alternative to traditional credit. Is it time for a showdown?

Online sales grew by more than 30% in the first year of lockdown, with some industries seeing increases of up to 60% in digital sales. BNPL has enabled retailers to integrate installment plan options directly into the digital sales journey on their site during a period of increased online sales, but is this the only driver of the BNPL market surge?

In March 2021, The Ascent revealed that more than 55% of consumers said they had used BNPL, up from less than 38% in July 2020. 41% of respondents said they did so to save money in case of unforeseen circumstances, while 25% said it was because they had already lost income.

Due to the confinement due to the coronavirus, consumers are tightening their belts. This has made BNPL an attractive option to spread costs over a longer period, but what happens once the economy returns to normal?

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Can Gen-Z trust BNPL?

BNPL may be a new buzzword, but it’s not a new concept. It is estimated that nearly a hundred years ago, in 1925, one in every seven dollars spent in the United States was on an installment payment plan.

The popularity of paying for items in installments was actually one of the main reasons for the Great Depression, as consumers taking advantage of this new purchasing option fell behind on payments and went into debt.

This is the source of the very reasonable fear that BNPL will cause another credit crunch because it allows consumers to spend beyond their means. More than 30% of BNPL clients have made late payments, so it does not seem irrational.

Yet reports have shown a 50% increase in the number of US consumers who claim to understand the consequences of BNPL. This is not surprising, given that 97% of young people believe financial literacy is important. As the younger generation becomes more financially savvy than their elders, is BNPL now a safer option than it once was?

Research shows that 68% of Gen Z’s budget and save more responsibly than their elders, while according to Finextra more than a third of young people in the UK have more than £1,000 in savings.

The pros and cons of BNPL

For consumers, BNPL means:

  • No credit check: Only a soft credit check is required, which will not affect credit scores whether accepted or denied.
  • No interest or fees: Since BNPL is paid in installments over a scheduled period, no interest is usually charged. Similarly, since retailers pay BNPL suppliers to meet customer demand, consumers do not have to pay a fee.
  • Retroactive support: Customers can take BNPL retroactively on products they have already paid for if they have any doubts or unforeseen circumstances arise.

Retailers, on the other hand, can expect a 20-30% increase in conversion rate. There seem to be only two outstanding points in favor of credit cards:

  1. Rewards and special offers: First, credit cards often reward customers with benefits such as travel insurance or frequent flyer miles. BNPL, however, could easily accept these options if consumers are interested in them.
  2. Flexibility: BNPL is a fixed plan that covers a specific purchase, while credit cards can provide a flexible amount of credit that can be used at various locations, partially refunded, and then spent again. Yet, of course, this leaves open the possibility of debts spiraling out of control.

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BNPL takes $10 billion from credit providers

It’s no wonder that BNPL is taking a share of the wallet from credit cards wherever they are prevalent. In fact, McKinsey believes BNPL Fintechs “…steals $8-10 billion in annual revenue from banks.”

That’s not the end of the story for BNPL players, however. Various BNPL fintechs, from Klarna to Affirm, are now offering credit cards to users who trust their digital specialty, but still need the flexibility of traditional credit.

Not content with taking a slice of the pie from credit card providers, BNPL players are now coming for the rest. In this environment, it is essential that traditional credit providers offer the same type of digital options.

Overcoming Obstacles to BNPL

So how can traditional credit providers and banks enter the BNPL space? It is a recognized product model that is simple to set up. There is only one obstacle: technology.

According to a BCG survey, 70% of companies failed in their digital transformation and received virtually no return on investment. Digital transformation is not a wise investment, yet, so how do you enter the BNPL space without overhauling your technology?

This is where a high productivity financial infrastructure comes in. Innovative digital technology can connect to your existing infrastructure and allow you to offer innovative integrated financial products like BNPL without having to replace your technology.

It is more than just a set of independently acting digital tools. It’s a new way of looking at banking architecture from the ground up. Without this, BNPL providers will continue to take market share from traditional credit providers who are stuck in a failed digital transformation cycle.

Written by Teodor Blidarus, CEO and Co-Founder of FintechOS

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