FINTECH SNARK TANK COMMENTS
Buy Now, Pay Later (BNPL) providers like Affirm, AfterPay and Klarna have generated a lot of press over the past year as consumers searched for ways to make it easier to buy what they want without contracting more. of credit card debt. Recent developments include:
- Amazon and Affirm have teamed up. Amazon shoppers will be able to split purchases of $50 or more into smaller monthly installments. Affirm said some loans will come with 0% APR, while others will bear interest.
- PayPal will stop charging late fees on BNPL payments. Since its launch, more than 7 million consumers have used PayPal’s BNPL service, purchasing more than $3.5 billion worth of products.
- Square acquired AfterPay. The deal will bring AfterPay’s merchant relationships into Square’s seller ecosystem and help convert AfterPay’s existing customer base into Cash App users.
- Apple announced a BNPL offer. Apple Pay users will be able to make interest-free BNPL purchases, choose any credit card to make payments, and avoid late fees and processing fees with certain plans.
Buy now, pay later to reach $100 billion in 2021
The percentage of Gen Zers in the United States using BNPL has increased sixfold, from 6% in 2019 to 36% in 2021. Gen Y’s use of BNPL has more than doubled since 2019 to 41%. Gen X adoption has more than tripled, and even baby boomers are getting in on the act.
Overall, consumers will make nearly $100 billion in retail purchases using BNPL programs in 2021, up from $24 billion in 2020 and $20 billion in 2019.
Buy now, pay later changes the customer experience
Observers on social media and the blogosphere say “BPL is here to stay.”
It’s an odd prospect because BNPL – also known as installment payments and point-of-sale financing (POSF) – has been around longer than some of the observers.
What’s different and important about today’s service, buy now, pay later, is its place in the customer journey.
Traditionally, installment payments, POSF, BNPL – whatever you call it – were an option at checkout (i.e. at the end of the customer journey). BNPL is now influencing consumers’ product and supplier choices (i.e. earlier in the journey).
Payments: the 5th P of marketing
Marketing students learn about the 4 Ps of marketing: product, place, price and promotion. According to to the creator of the 4 Ps, Northwestern Professor Philip Kotler:
“The marketing mix is the set of controllable variables that the company can use to influence buyer response. The four variables help a business develop a unique selling point as well as a brand image. »
Payments have become an important part of the selling proposition and should be considered the 5th P of marketing. For example, by varying payment terms, such as spreading payments for a purchase over a period of time, marketers can influence consumers’ likelihood of purchase.
As merchants experiment with surcharges on card-linked payments, do they run the risk of reducing sales or the average transaction size? Do they risk losing sales to merchants who don’t overcharge card transactions?
If the answer to these questions is yes (and BNPL vendors claim so), then BNPL (and payments in general) is an element of the marketing mix that marketers can leverage.
The Future of Buy Now, Pay Later
To succeed and differentiate, BNPL suppliers will need to:
- Become shopping destinations. Afterpay, for example, announced that it would allow its merchant partners to advertise on the BNPL firm’s application to boost their promotions, products and offers. Brands will be able to choose the products they want to promote through sponsored ad formats and only pay when a shopper interacts with the ad.
- Refine their sales attribution claims. BNPL’s suppliers claim that they help merchants make sales that otherwise would not have been made. Sound familiar? Visa and MasterCard have made the same claims about the credit cards they’ve launched. Today’s merchants will demand accurate attribution statistics.
- Specialize. BNPL providers will have to master the customer journey. Few (if any) will be able to do this in more than a few product categories, leading to specialization by product category. This is already the case with BNPL specialists like LoanStar Technologies in home improvement and Prima Health Credit in elective medical procedures.
BNPL’s stand-alone providers won’t last long
Why does Square need the Afterpay app to allow merchants to advertise when it has a wider reach than Afterpay? Answer: It is not. Expect the Afterpay app to be integrated and absorbed into the Square app once the acquisition is complete.
As Afterpay is absorbed into Square, its payments will increasingly come from the Square network, not traditional payment channels. Other BNPL providers will need to find similar paths in order to keep up with the margin improvements that Afterpay will achieve.
Same thing with Amazon and Affirm. The retail giant is partnering with Affirm – instead of acquiring the company – to test the impact BNPL can have on sales. If positive, they will acquire Affirm or develop their own BNPL capability.
That’s not to say that with their high valuations, some of BNPL’s suppliers – Klarna is a good example – won’t be acquirers themselves. Why? Because a BNPL offer, on its own, is only one link in the value chain (or customer journey).
To maximize the value of buy now, pay later, it must be integrated with the other elements of the marketing mix, i.e. become the 5th P of marketing.
The downside of buying now and paying later?
BNPL has its detractors, however. consumer advocates criticize BNPL programs that encourage consumers to take on debt that they might not be able to afford:
“There is a risk that BNPL programs will attract people who are already in financial difficulty and who are struggling to pay their existing bills and payments.”
There is evidence of this. Among BNPL users, 31% consider their financial health to be “disastrous” or “in difficulty” (versus “managing” and “prosperous”). In contrast, among consumers who do not use BNPL services, only 20% rate their financial health as poor or in difficulty.
Other warning signs back up the critics’ claims:
- Over the past two years, 43% of BNPL users have made late payments. Two-thirds of them, however, said it was because they lost track of when the bill was due – only a third blamed it for not having the money to pay the bill.
- More than half of BNPL users saw their credit card limits reduced in 2020. This likely led some consumers to use BNPL programs.
Critics’ warnings will no more slow BNPL’s growth than their warnings about the dangers of using credit cards have had on the growth of this product.
Can banks fight back?
For now, the majority of BNPL purchases are paid for with a debit or credit card. So if the banks don’t get their money up front (ie at the time of the transaction), they collect their interchange fee when the BNPL players get paid.
It won’t last.
Merchants have two things in common: 1) they will do anything to make a sale, and 2) they (passionately) hate trading.
If merchants can reduce interchange fees by shifting debit and credit card purchases to other forms of payment, they will do all they can to make that happen.
As Buy Now, Pay Later vendors collect more data about consumers’ buying and shopping behaviors, they will become better partners for merchants than banks and payment networks.
The long-term impact on banks: less interchange revenue and customer engagement.
The clue to what banks can do to fight back comes from the number of BNPL users who have been late on a payment because they lost track of the bill’s due date. Banks can fight back by helping consumers better manage their money.
This will be a difficult challenge for banks that see themselves as product providers (e.g. current account, savings account, loan) and not service providers (i.e. advice, guidance, monitoring ).
My bet: Banks will retaliate from a regulatory perspective by focusing on the alleged disadvantages of BNPL and the “risks” it poses to consumers. I don’t think they will win this battle.