In the 1970s, mail-order catalogues became popular because, during a period of dismal economic depression, they enabled customers to order multiple items on tick, have them delivered to their door, and pay the bill in bite-size instalments. Sound familiar?
Like all new trends, this came with teething problems – including a large number of customers who ordered far more than they could realistically pay for. Debts to catalogue companies soared, while the credit ratings of the younger generation predictably dipped.
Half a century later and on the tailend of increased online purchases, BNPL appeared at the checkouts of millions of ecommerce outlets and instantly began to trend. Like a magic bullet payment solution, given at a time when global populations were placed under enforced lockdowns as a result of the pandemic, it's hardly surprising that BNPL’s usage skyrocketed.
But along with this came the same, age-old problems associated with free and easy credit: despite five decades having passed, lack of regulation in terms of lending has resulted in debt once again visiting a generation of enthusiastic young shoppers.
Encouraging a culture of impulsive buying, BNPL services have conclusively been found to fuel personal debts. A recent report from the UK-based e-wallet fintech HyperJar revealed that 25% of the debts accumulated by Millennials are due to BNPL schemes.
Easy credit boosts toxic spending
Amir Nooriala, Chief Commercial Officer at Callsign, says the temptation to take advantage of the easy-to-obtain, zero-interest credit agreements have not only encouraged irresponsible spending but also an uptick in fraud.
“Current economic headwinds and the pandemic placed real burdens on the finances of many, but appetites for convenience and consumer goods haven’t waned,” he explains. “This has led to younger consumers wanting to buy now and pay later for goods – an attractive option when it comes to financing purchases at times of economic hardship. BNPL has emerged as one of the most popular online payment methods, due in part to the ease of use for consumers.”
Nooriala continues: “Fintech start-ups have capitalised on this ‘boom’ and investors, too, have found it a lucrative opportunity, so the pace of growth has been relentless. Unfortunately, so far, the unregulated nature of BNPL has not only encouraged companies into the space, but also fraudsters as well.”
Ecommerce cart abandonment at the POS
It’s easy to see how this situation has come about. As shopping methods increasingly moved online, competition has soared. Even just a decade ago, shoppers were searching online for specific goods from specific providers. They were purposeful and decisive in their actions, because the online shopping environment offered high-street alternatives rather than the actual high street.
Today, increased cart abandonment is endemic, with some reports showing that as the cost of living crisis has soared, so has the volume of customers clicking away from their virtual shopping baskets before hitting the checkout.
5 ways BNPL has transformed the ecommerce marketplace
- BNPL encourages consumer spending: Studies show that customers are more likely to purchase large ticket items if BNPL is available to them.
- BNPL provides interest-free credit options: Depending on the scheme, BNPL generally offers customers a much cheaper credit option than a credit card. Instalments for certain term arrangements are often interest-free.
- BNPL reduces cart abandonment for retailers: This boosts their sales and gives them a competitive edge in an increasingly busy marketplace
- BNPL companies pay the total amount to retailers: As soon as a purchase is made, retailers receive their cash. This saves businesses from financial risks.
- Over time, BNPL provides businesses with: Increased conversion rates, better sales, and increased average purchase limit of customers.
Online retailers are facing an upward battle to remain profitable because of this.
Put into perspective, recent data from the Baymard Institute – which collated information from 41 different studies on the issue of cart abandonment – shows that in late 2022, the problem had hit a 70% average across the ecommerce marketplace.
That means 70% of customers, on average, walk away from their intended purchases at the point of payment. And this is after the added incentive of BNPL has been offered.
Promoting good business and good lending practices
The battle facing BNPL providers now is to reach that middle ground that provides enough good incentives to retail keep customers interested, without resorting to irresponsible lending.
Reports show that flexible payments offered by BNPL services do reduce cart abandonment rates. They can also encourage shoppers to increase the size of their purchases. What’s more, when ecommerce stores provide BNPL service at their checkouts, they can also expect an increase in their average order values (AOV), which is one of the best ways to generate more income.
But, how can these benefits be balanced out in terms of good lending practices?
Nooriala says regulating the space will be the key to better services and a healthier outcome for customers. “The new regulations announced by the UK government will better protect millions of consumers through the strengthened regulation of interest-free BNPL credit arrangements, and that should be welcomed. They will help reduce financial harm to consumers and ensure that BNPL advertisements are fair, clear, and not misleading.”
However, he points out that the new regulations don’t go far enough when it comes to protecting consumers from fraud, as they do not require BNPL providers to implement technologies such as behavioural biometrics to reduce fraud and build digital trust. This is something Nooriala would like to see implemented in the UK, as it would be in line with regulatory moves being considered by the European Union.
The future of BNPL in a depressed economy
Ultimately, the problems that have come to light of late are part of a natural maturation process for any new business or service: regulators assess the issues that arise and act accordingly – and BNPL is no exception.
But these services are also applicable to business payment services. Chris Tsai, CEO of Resolve, says that despite the downturn and tough new regulations in the pipeline, leading BNPL players are thriving. This is especially true for consumer players like Affirm, who know how to underwrite and grow in all market conditions.
“It may be tougher for others with lesser capabilities in a recessionary environment. But for B2B BNPL players, it’s even more exciting as so many B2B companies are ‘getting religious’ about how to modernise their business payments – net terms, accounts receivable processes, and so on – for the digital age.”
B2B BNPL vs B2C BNPL regulations
When it comes to regulatory requirements, Tsai says differentiating between B2B and B2C BNPL services is also important. “While B2C BNPL is being watched very closely by regulators and investors as a brand new approach to consumer lending, B2B BNPL should more appropriately be considered the digitisation of business payments and practices that have been occurring since the beginning of commerce.”
He points out that, prior to BNPL, it wasn’t uncommon for B2B companies to already use net terms for extended credit. “What we are seeing now in the B2B BNPL space are technologies that are allowing a broader swath of companies to embed these tools into their accounts receivable functions which ultimately increases their access to working capital and provides downstream workflow efficiencies.”
He adds: “B2B BNPL is absolutely thriving as companies of all sizes learn about ways in which they can improve their business operations through embedded-finance tools.”
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