Articles by Tal Schwartz
During this year’s online Christmas shopping you may have noticed a new button at checkout from your favourite BNPL providers – “Pay Now”.
The pay in full option allows shoppers to initiate a direct bank transfer without pulling out a credit card. Both Klarna (through their acquisition of Sofort) and Affirm have launched theirs.
This begs the question… umm why?
Customer preference. “I thought the whole point of BNPL was to spread your payments out over time?” Merchants attract more shoppers, shoppers receive interest free loans. It’s a win-win.
Correct. But not all shoppers are looking to defer payments in installments or to the end of the month on their credit cards. By offering a one-click pay in full option, BNPLs widen their net to shoppers not interested in financing.
Regulation. As with all financial products, regulators are sensitive to marketing; particularly ensuring that consumers are not being encouraged to take on more than they can afford. A pay in full option sends a strong sign to both regulators and consumers that BNPLs are completely aligned with any payment preference.
Banking > Lending. BNPLs are expanding beyond POS finance to a full banking suite of products:
- Klarna recently launched virtual cards in the UK.
- Affirm launched a cash-back savings account.
- Afterpay is now part of the artist-formerly-known-as Square (Block), and will be integrated into their suite of small business banking solutions.
- PayPal has gone the opposite way, starting with checkout and expanding into BNPL themselves and through their acquisition of Paidy in Japan.
All four of these companies are converging around an online banking model that goes well beyond payments and lending.
Payment processing. Payments are a zero-sum game. At checkout, there can only be one winner per transaction. A shopper either pays with cash, cards, or more recently installments (over simplification). Visa and Mastercard have expressed concern that BNPL eats into the demand for revolving credit, and in turn their payment rails. A pay now option will take even more traffic away from these rails, allowing BNPLs to compete head to head with the payment titans.
Point-of-sale (POS) lenders, also referred to as buy-now-pay-later (BNPL) firms, allow shoppers to break up their individual purchases into installments, often without interest. By adding BNPL as an option at checkout or further upstream in the purchase process, the consumer’s buying power is increased and they are often less likely to abandon their checkout cart. It is a win / win for all stakeholders.
For these reasons, POS lending is one of the fastest growing segments in unsecured credit, with volume increasing at 40 percent year-over-year. COVID has further accelerated the demand for credit options at checkout.
According to McKinsey, annual growth is expected to jump to 150 percent thanks to an explosion in online shopping and government subsidy programs boosting retail sales. In Canada, firms such as Uplift, Paays, and PayBright are all seeing merchant demand skyrocket for their services, with the latter onboarding over 250 merchants per month.
POS lenders are able to subsidize APRs by charging the merchant a fee of 4-6 percent of the purchase price. This is on average 2 percent more than the fees charged by credit cards companies. Despite the larger fee, BNPL is very attractive for retailers for a number of reasons. By providing point of sale financing retailers see:
- 30% increase in basket size
- 25% reduction in cart abandonment
- 20% increase in repeat traffic
With installment payments as an alternative, credit cards have seen a decrease in popularity among young shoppers, particularly on smaller ticket items under $500. There are a number of reasons why:
1. Clunky signup experience. Signing up for a credit card at checkout requires lots of paper, personal information, signatures and significant patience – antithetical to the one-tap checkout shoppers are accustomed to. Alternatively, BNPL approval is instant at checkout. 75% of merchants even advertise POS financing far before the register, at the beginning of the customer journey which can increase conversion by two to three times.
2. Challenge to qualify. 19 percent of consumers ages 22 to 30 lacked the credit history to be approved for credit cards in the first place. Many BNPL products do not perform credit checks, and those that do use alternative data sources to underwrite thin-file borrowers.
3. High APRs. With their parent’s household debt in their rear view mirror, many younger shoppers have an aversion to carrying revolving credit balances. Millennials on average carry two fewer cards than their parents. Psychologically, $1000 on your credit card looks scarier than four installments of $250 over time.
4. Customer confusion. Inactivity fees, late fees, over-the-limit fees, cash advance fees, are all poorly understood and masked within dense monthly statements. BNPL offers an elegant digital first experience and straightforward reporting.
The Supporting Cast
Today POS lenders are competing in a land grab for merchant partnership. But for FIs and fintechs who have yet to plant their flags, there are still ways of participating in the BNPL boom.
- Banks. Banks have largely participated indirectly in the BNPL sector, by providing portfolio financing to fintechs or by offering installment options for larger ticket items within their existing credit card programs. Wayne Pommen, CEO of PayBright, sees more bank and fintech collaboration in the next few years: “I predict more buying and partnering, Banks are too far behind to build this themselves.” Marcus Pay, the recently launched retail banking arm of Goldman Sachs is the only group to directly compete in the POS financing ring, with JetBlue as their launch partner.
- Platforms. E-commerce enablers that power millions of independent merchants are piling in to embed POS financing within their platforms. Marketplaces Ebay and Etsy have partnered with Afterpay and Klarna, while the digital infrastructure whale Shopify has an agreement with Affirm.
- Cards. Traditional credit card companies who have the most to lose from BNPL are getting ahead of the trend in several ways. Visa took a controlling stake in Klarna in 2007. More recently they launched Visa Installments, a developer tool for issuers in the Visa network to pilot branded installment products. Though Visa Installments stretches the definition of BNPL, David Fry, CEO of travel financing startup Paays does not mind the ambiguity. “I am not religious about the distinction between cards and installments. What we care about is what the customer is looking for, and what they have to pay to get access to that product”.
POS Lending has the potential to transform consumer lending as it’s evolution is inextricably tied to the growth of e-commerce. It is all about understanding the needs of the shopper and their digital journey. POS lenders are making it increasingly easy for merchants to streamline the buyer path to purchase.