However your Christmas went, it was a good time for online retail and for retail lending. The retail holiday season started in earnest with Black Friday and Cyber Monday, when stores launched sales and consumers rushed to pick up purchases at lower prices. Data from banks and card issuers suggests consumers in the UK spent £9.2 billion on Black Friday weekend and Buy Now Pay Later (BNPL) has been key to this surge.
by Teo Blidarus, CEO, FintechOS
Today, more and more consumers are using BNPL to spread the cost of purchases, allowing them to buy expensive products that would be simply unaffordable without access to retail lending services. In the UK, data from Citizens Advice shows 17 million consumers have already used a BNPL company to make an online purchase and one in ten were planning to use BNPL for Christmas shopping.
Customers like BNPL because it’s often interest-free, allowing them to spread the cost of purchases over several months or even years. Retailers like it due to its tendency to encourage larger purchases and reduce abandoned carts. It’s also convenient, offering a full lending journey embedded in the point of sale. Consumers now expect BNPL, meaning that those who don’t offer this form of retail lending will likely lose out on sales.
Buy Now, Pay Later’s rise
According to Juniper Research in the UK, BNPL will account for £37billion of spending in 2021. That same study found that BNPL services that are “integrated within eCommerce checkout options, including fixed instalment plans and flexible credit accounts” will drive $995billion of spending globally by 2026, up from $266billion in 2021. This has been driven by the pandemic which has put financial pressure on consumers and added extra demands for credit options.
It’s not just attractive for younger audiences, either. In fact, all age groups are using the option to pay in instalments. 36% of Generation Z used BNPL in 2021, compared to just 6% in 2019, according to Cornerstone Advisers. Millennials doubled their use of BNPL in the same time period from 17% to 41%, while Baby Boomers’ usage grew from 1% to 18%.
When shoppers get to the checkout, they aren’t only more likely to make a purchase but to spend more money. RBC Capital Markets has estimated that retailers offering a BNPL option will enjoy a conversion rate uplift of between 20% to 30%, as well as an increase in ticket size of between 30% and 50%.
Retailers are racing to get involved in BNPL. In the US, Amazon partnered with BNPL provider Affirm in August to offer “pay-over-time” on purchases over $50. Walmart and Target also teamed-up with Affirm – and they are not alone. Mastercard is preparing to launch a product called Instalments next year, and fintech challengers like Curve, Monzo and Revolut are all launching into the market.
Banks are slow to the party
Despite the rush from many providers to ride the BNPL wave, banks are slow to join the party. Many still only offer their customers credit cards, leaving money on the table.
The average value of BNPL transactions in 2020 was 25% higher than transactions that used other payment methods, once again showing that BNPL enables bigger purchases. All this data should illustrate a clear point: if banks don’t cater for BNPL, their competitors – big tech, fintech, and payment firms – will race ahead.
Why banks should look to cash in
Banks are in the best position to win at BNPL, they already possess the expertise around compliance, and have a wealth of customer data that can enable tailored BNPL offerings. With the right technology partner to do the heavy lifting, banks can reap the rewards of building stronger products and relationships with their customers.
Another reason to partner is down to maintenance. In the future, as BNPL becomes more popular and reaches critical mass, the underlying technology will be put under strain and may face resilience issues. If the technology is not robust enough to cope with the huge web traffic caused by big retail moments, businesses have a problem. Their BNPL platform should also be easy to maintain so that it can be fixed quickly on a self-service basis if something goes wrong at this critical time.
BNPL now, not later
The time for banks to introduce BNPL is now. McKinsey has warned that “fintechs have taken the lead” in this space “to the point of diverting $8billion to $10billion in annual revenues away from banks”.
So far, only a small number of banks are responding fast enough and bravely enough to compete. A great example of this is Barclays, who recently teamed up with Amazon in the UK to create a BNPL option for Amazon’s consumers. Those who spend over £100 with Amazon can now spread payment between three and 48 months. The ball has already started rolling for banks – those that ignore the opportunity will likely see loss in market share and miss out on custom from younger demographics and new-to-credit customers.
For banks it should be BNPL now, not later otherwise they will miss out on a vast new revenue stream.