Retail installment plans are not a new concept. The twenty-first century ushered in a new generation of consumers who never experienced the painful waiting game of saving and paying off the purchase of a new winter coat or appliance before bringing it home. As credit card popularity rose among consumers in the 1980s and ‘90s, layaway purchases became a thing of the past.
In the digital era, consumers want seamless shopping experiences and immediate access to their purchases. Now, retailers and third parties are offering same-day delivery as well as Buy Now Pay Later (BNPL) payment options. While some believe that BNPL will replace traditional credit cards, others view it as an entirely new payment method supporting the cashless consumer.
According to The Financial Brand, customers are opting for BNPL options because it helps them avoid credit card interest and breaks larger purchases into digestible payments. As an embedded e-commerce experience, BNPL provides ease of use during checkout with saved credentials for expedited purchases. It offers buyers instant credit, allowing them to make purchases whether they have the funds or not.
Although it may appear that there is no interest accrued on BNPL payments, users can incur a late payment fee. This may put users at a disadvantage if they are tight on funds or forget to make a payment. While alternative payment methods give consumers flexibility, many people are wary of BNPL firms engaging in predatory lending. If BNPL methods are backed by a financial institution (FI), consumers may feel more comfortable in their installment plan, knowing that their FI prioritizes their financial wellbeing.
While BNPL can be helpful for the consumer, FIs who care about their customers’ or members’ financial wellness are hesitant to support purchases that are beyond the consumers’ means. Unlike BNPL vendors, FIs are focused on their long-term customers or members and want to see them achieve their financial and life goals, which may include buying a home, raising a family, or growing a safety net through savings accounts.
“The buy now, pay later (BNPL) market is expected to grow 181% by 2024, and will account for 13% of all global e-commerce payments that same year, according to the 2021 Global Payments Report by Worldpay from FIS.” (FIS, 2021)
The Types of BNPL
Why do consumers like BNPL? Because it provides them with a transparent installment plan that displays how much their payment is, how often to make a payment, and how long until the purchase is paid off.
This method of BNPL is embedded into checkout experiences. It allows consumers to select short-term financing for their purchase once they have paid an initial down payment.
This method encourages consumers to make purchases on their credit cards. They later work with their FI to convert this payment into an installment plan.
Consumers are spending more, so how can FIs gain share of wallet with BNPL?
The United States was slower to adopt because of consumers’ high use of credit cards. Because of this payment switch, FIs are looking to see where they can disrupt the market and get in with the trending payment method.
In a recent survey, 31% of respondents opted for a BNPL payment option, “for purchases of more than $1,000.” Luckily for FIs, consumers like all of these methods!
With post-purchase BNPL, FIs can help users convert their credit card purchases into an installment plan. This will keep transactions flowing within the FI, rather than having money depleted from checking accounts. For customers and members, they will appreciate the payment flexibility their FI provides as they earn reward points on their credit card purchases.
As consumers increasingly choose digital payments, FIs must respond with digital options to gain share of wallet with users and stay relevant. Going forward, FIs will need to keep their eyes on emerging payment technologies and drive innovation to deliver on consumer needs.