What is Buy Now Pay Later? A guide to the best Fintech trends for Black Friday

For many years, stores have allowed customers with a limited budget to pay for expensive items in instalments. Buy Now Pay Later (BNPL) probably began in the 1980s with department stores such as Nordstrom introducing private label credit cards – but can be traced back to the 1840s when high value purchases such as furniture or farm equipment could be paid off in weekly/monthly installments.

Despite the shift to digital purchases, pay-over-time programs remain a useful tool for everyone, from millennials and Gen Z shoppers who are spearheading the trend – right through to older/mature customers who are starting to embrace it. The traditional brick-and-mortar store solutions have evolved into pay-over-time models due to the rise of e-commerce.

Especially during mega-shopping events like Black Friday, the BNPL fintech trend becomes extremely popular. In 2021, BNPL spending in the US increased by 230%, and the increase continued well into the holiday season. This year, 1 in 5 Gen Z shoppers in the UK will choose buy now, pay later options for Black Friday. So, what makes this such an important fintech trend of our time? With the start of the 2022 holiday season, let’s explore what Buy Now Pay Later is and how it works.

What is Buy Now Pay Later? Definition

Buy now, pay later (BNPL) is a type of short-term financing that enables customers to shop and pay for these at a later time, often without accruing interest. BNPL agreements, commonly known as “point-of-sale installment loans,” have emerged as an increasingly common payment method, especially for online purchases.

Traditional banks have refrained from entering the BNPL market for fear that it could eat into their lucrative credit card business, while startups have spearheaded the adoption effort. Banks have recently realized that cards and BNPL can coexist and actually complement each other.

Banks use BNPL to attract new customers who have avoided credit cards in the past. For example, a major bank could partner with a BNPL fintech company to give retail customers the ability to pay later in-store. This enables customers to buy expensive products in monthly installments from a recognized financial institution. As well as offering a free loan option, it reduces paperwork to facilitate easy and quick onboarding.

How does Buy Now Pay Later or BNPL work?

Each fintech company has its own terms of use, but in general these are how installment loans work. At checkout, the customer starts a purchase from a participating store and selects buy now, pay later.

If authorized, the customer pays a modest deposit, such as 25% of the total purchase price – but some companies and regions operate with zero down payment. The remaining balance is then repaid in a series of interest-free payments. Customers can pay by check or bank transfer, and payments can also be automatically debited from a debit card, savings account or credit card.

Typically, BNPL contracts do not include interest or fees, but have a defined repayment timeline. The bank or fintech provider must tell the customer in advance the amount they have to pay each time, which is often recurring. It is similar to various forms of unsecured consumer loans or personal loans. Not all items may be available for BNPL financing, which is important to note (eg precious metals); furthermore, there may be limits on how much you can fund via this approach.

For BNPL approval, the majority of fintechs only need a soft credit check, which does not affect the user’s credit score. This adds a crucial element of speed and convenience to holiday shopping. Some BNPL loans are submitted to at least one of the three major credit reporting agencies (Equifax, Experian and TransUnion). If a finance company submits this data, the loan card can affect your credit score and appear on credit reports.

Income opportunity for fintech

In most BNPL transactions, the fintech provider acts as the lender and compensates the merchant at the time of the transaction. They assume responsibility for extending credit and recovering payments from the customer over the BNPL period unless they work with an existing banking partner.

As both payment processor and lender, BNPL suppliers accept the risk of non-repayment by the customer. As compensation for the risk involved, they offer sellers a discount on the total transaction price. The creditor/lender then collects installments from the customer corresponding to the total purchase price. The lender’s main source of income is the difference – what they paid and what they got back throughout the BNPL period.

BNPL operators are high-tech businesses with expensive platform and infrastructure expansion costs. They must provide compelling reasons for customers and sellers to choose their services over their competitors. Most fintechs use proprietary algorithms to underwrite their customers’ unsecured credit risk without disclosing their approval criteria.

Advantages of Buy now, pay later

Global demand for the BNPL concept is increasing as countries recover from the aftermath of the pandemic. Compared to the pre-pandemic period, offline companies have seen a sharp decline in customer availability. BNPL and free EMIs can help businesses absorb this impact, due to its many benefits:

1. Seamless onboarding and frictionless approval

Unlike bank loans and credit cards, BNPL operators do not require tedious paperwork and cumbersome procedures. To initiate transactions, customers can register with BNPL with an electronic KYC, allowing companies to start the sales process immediately.

2. Better shopping experience during Black Friday and other holidays

Businesses that provide customers with varied and flexible payment methods increase customer satisfaction and experience as a result. When it comes to consumer satisfaction, companies offering flexible payment options such as BNPL and interest-free EMIs have an edge over those with inflexible and conventional payment options.

3. Increase in income for retailers

BNPL helps customers make the wagon valuation more affordable. Because of this, it is increasing in popularity and helping retailers and small businesses generate more money. BNPL is more prevalent among millennials and members of Generation Z. When expanding its reach to this target consumer demographic, the BNPL model can be a game-changing strategy.

4. Possibility of repurchase

A positive customer experience increases customer retention. If consumers enjoy the shopping experience and have access to easy payment methods, they are likely to return to the same business for future purchases. They are also more likely to remain loyal to the financial institution that provided them with a hassle-free Black Friday shopping experience.

5. Win-win for fintech and banks

Fintechs benefit from a simpler and faster process for buying merchants and customers, a reduction in credit risk and an increase in transactions. Due to reduced regulatory capital requirements, banks can use their current opportunities, for example more flexibility for loan terms and increased capital use. BNPL also presents the potential for cross-selling to banking and fintech customers who are more likely to be engaged.

Fintechs at the forefront of the BNPL area

The following fintech companies offer “buy now, pay later” technology that is revolutionizing the industry:

• Upstart: Upstart is a prominent artificial intelligence (AI) lending platform that aims to increase access to affordable loans while reducing the risk and cost of lending to its banking partners.
• Du Xiaoman Financial: Du Xiaoman Financial is a provider of investment and short-term lending services. It is better known as Baidu Financial Services Group (FSG) and serves as the fintech arm of Baidu.
• Sunbit: Sunbit is a supplier of BNPL technology. Almost 7,300 websites offer in-store and online access to the company’s services.
• Confirm: Affirm is a BNPL payment service in the US that enables consumers to set a convenient payment plan before loan approval.

Apart from this, tech companies like Amazon, PayPal, Apple, etc. are also looking to establish a strong presence in the buy now, pay later space. Indeed, GlobalData, a data and analytics company, estimates that the BNPL market will exceed $1 trillion by 2030, partly due to the participation of big tech.

By 2030, regulatory bodies will have cleaned up the opaque BNPL operations by enforcing strict transparency and credit checks, the report predicts.

Suffice to say, BNPL is an important fintech trend for retailers and financial institutions alike – as we prepare for the Christmas shopping season of 2022. Together with other key trends such as 3D secure and mobile payment security, it has the potential to completely transform how people shop and what customers expect from their fintech providers.