With the growth of FinTech innovation worldwide, a new payment option Buy Now, Pay Later appears as a disruption in the payments space and one of the fastest-growing payment methods. According to Research and Markets, the BNPL provider Klarna gained 60 million users last year, while the sales of Affirm and Afterpay have grown by more than 75 percent. In the APAC region, Japan’s AFTEE and Singapore’s Atome are also actively expanding their markets overseas. As a result of the continuous innovation of the payments ecosystem, Apple also announced its BNPL service early this month to respond to the latest consumer finance trend, and the leading online payment provider PayPal also entered the race with its Pay Monthly service.
In the past, consumers often used a credit card to pay in installments for high-priced products, which is not available for people without credit scores or students. “Buy Now, Pay Later (BNPL)” thus is gaining popularity fast, as it allows interest-free installments for consumers to make purchases without a credit card.
Let’s picture this: A consumer is looking for a computer on an e-commerce website or in a physical store. Products like computers have high unit price, low purchase frequency and longer lifespan, and consumers often have to choose between two products; Product A is not the best choice but within the budget, and Product B exceeds the budget but meets the needs. This buyer hesitation can result in delay in purchases and low conversion. If merchants provide an option for consumers to make purchases first and pay for them in the future, through a certain review mechanism, even a credit novice is able to pay in monthly installments; this will increase consumers’ purchase intention of products exceeding a budget, and shopping platforms or brands can also expand their consumer base.
The Grand View Research has pointed out that the global BNPL market size is expected to hit USD 39.41 billion by 2030 with a CAGR of 26.0% in its latest report. Characterized as a flexible and convenient payment method, Buy Now, Pay Later can improve purchasing power, and is becoming popular among consumers, especially Gen Z consumers, who have seen a growing spending power in e-commerce. All these phenomena have made businesses start applying new technologies to respond to the diversified buying scenarios. How can businesses choose the right BNPL services?
The top priority to enable the BNPL service is the review mechanism. Service providers need to conduct “automatic” evaluation and analysis of consumer credit and fraud risks. This relies on technologies such as big data, machine learning, open banking and more to complete identity verification, analysis of credit history and affordability, and risk assessment in a few minutes, with measures to prevent money laundering and fraud. Delivering satisfying services and mitigating risks require effective BNPL solutions.
BNPL is actually equivalent to “short-term loan”, and the creditor is not the bank but the retailer. Government regulation is needed despite the management through a third-party platform. With increased fraud, many countries have rolled out strict regulations. For example, the British government recently announced a plan to strengthen supervision of BMPL services. This includes an “affordability check”, and merchants must ensure that advertising is fair, clear and not misleading. The regulatory actions are all to make services compliant, and make sure e-commerce platforms and BNPL service providers fully comply with the law to protect consumer rights.
As BNPL offers fast and short-term services, open banking can be a solution to access consumer credit information, which allows automatic, fast and accurate review mechanisms. With the consent from consumers, BNPL services can access and check personal account data, deposit or bank transaction records, which further helps with decision-making.
Through the planning of services with business logic to enable the seamless connection between enterprises and BNPL provider systems is the key to delivering high-quality customer experience, and automating the payment processing is indispensable, such as automatic payment reminders, collection process, payment allocation, tracking, interest calculation, reconciliation, etc. To increase service efficiency, a highly automated BNPL solution is all you need.
With the widespread BNPL adoption, purchases no longer require a banking process, and it is possible to become an alternative to credit cards in the future. Nevertheless, it also creates hidden risks for both BNPL lenders and borrowers. Customers are more likely to make impulse purchases and spend more than they can afford; despite no interest rate and service fees involved, BNPL loans still charge late payment fees. Businesses may also find it hard to evaluate consumers’ credit without credit score information, and they need to bear the risk of bad debts, which is still a challenge to overcome.
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