Point-of-sale financing isn’t new. Buying a new car and taking out finance at the dealership has been a reality for decades. Like most things in our lives though, POS financing has had to digitise.
E-commerce is booming and POS finance options like lending and buy now, pay later (BNPL) deliver the seamless experience customers demand, plus tick the boxes of instant gratification and flexible payments.
Such is the appetite for this type of fast and flexible financing that BNPL is now “the fastest-growing online payment method in many economies,” according to EY.
Buy Now, Pay Later is an option that shoppers can opt into on checkout that lets them complete a purchase and make the payments over instalments. Specifics differ between products, but most BNPL models offer approval within seconds and then require a 25% deposit with the remaining payable over a series of interest-free instalments. Some providers require a credit check, although most make a ‘soft inquiry’ that has no impact on a customer’s credit history.
With about £100 billion in sales in 2020, the UK ranks as the world’s third largest e-commerce market. Growing about 70% from 2019, BNPL contributed roughly 5% of this transaction volume, Worldpay estimates, a figure that experts predict could move closer to 25% in penetration in the coming years.
New research by the Financial Conduct Authority (FCA) supports this, with the total value of BNPL transactions in the UK doubling between 2020 and 2021, topping £5.7billion. Much of that volume was through the UK’s biggest BNPL providers: Klarna and Clearpay although there is understandably growing competition amongst fintechs and banks that are vying for a slice of this growing segment.
“The combined forces of digitisation, a pandemic-accelerated shift to online shopping and the rise of young, engaged consumers mean that buy-now-pay-later (BNPL) is now the fastest-growing online payment method in many economies.”
EY, 2022
While there is a clear segment of the BNPL users that are young, often female consumers who are using the products to purchase from fashion brands, there is no denying its broader appeal.
25%
of 18-to–74-year-olds paid with BNPL at least once in 2021.
Bain, 2021
One survey found BNPL adoption was highest among respondents aged 25 to 34, and significant even for those in the 45-to-54 cohort. Some 68% of people who used BNPL in the previous six months also have access to a credit card (compared with 62% across the entire sample), suggesting significant penetration among people with prime and near-prime credit profiles.
“We found BNPL usage was relatively consistent across household income levels, and for men and women.”
Bain, 2021
This broad demographic trend is set to continue as fintechs and banks innovate to create POS finance products targeted at a range of industries beyond the fashion retailers that have been their traditional customers.
Goldman Sachs spent £1.6billion last year to acquire GreenSky, a BNPL fintech focused on spreading the cost of home improvement loans, while Barclays plans to extend an existing BNPL venture – which charges interest – and offer credit to Amazon’s UK customers at the checkout.
Flexible payment options benefit consumers, but also those offering them – in both the long- and short-term. While the cut BNPL providers take on transactions may seem counterproductive for retailers, its benefits overall may outweigh this and then some.
BNPL is considered an effective tool to reduce cart abandonment and increase sales by allowing consumers to make purchases they might otherwise have overlooked because of price difficulties, and retailers get a higher AOV from customers who will happily add more items to their cart if they don’t have to pay for it all at once.
20%
BNPL options at checkout increase retail revenues by up to 20%.
Consumers also report enjoying payment options that take the burden off of their credit cards. BNPL transactions tend to offer their payment plans interest-free, which keeps buyers safe from having to drop large upfront charges on their credit cards. During the busiest times of the year, like Christmas, when credit scores and late fees are on consumers’ minds, it’s a relief for them to have BNPL to make their purchases more manageable.
And of course, POS financing such as BNPL supports the type of BAAS-driven embedded finance experience customers demand, offering flexible finance options – and approval – quickly and with just a few clicks, driving brand loyalty as well as other valuable metrics.
Read More: How BaaS is Shaping the Fintech Ecosystem
Benefits to consumers and merchants aside, many are raising alarm bells at the popularity of BNPL, both from an ethical and longevity standpoint.
An estimated 25% of some BNPL platforms’ revenue comes from missed payments, which raises questions about the sustainability of the model. A lack of consumers’ credit transparency and affordability is also a concern due to the increased risk of defaults.
10%
Of customers of one major bank who used BNPL for the first time were already in arrears, according to the UK’s Woolard Review.
And at a time when the cost of living crisis continues to stretch the wallets of many, there are concerns over the ethical implications of offering finance so quickly and easily.
BNPL financing can create a ’dangerous illusion’ that purchases are cheaper than they actually are, reports Fortune.
It’s a concern that’s alerted regulators in the UK. The currently unregulated BNPL industry will likely have to operate under new measures from 2023, with the government expected to publish draft legislation this year that includes requirements for providers to carry out affordability checks, gain approval by the Financial Conduct Authority (FCA) and ensure adverts are fair and clear.
There’s no doubt that POS financing will play a role in the race to provide users with the ultimate embedded finance solution, but new regulations could dampen the BNPL boom.
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