Dynamic growth of BNPL services

For several years, the deferred payments service called BNPL (Buy Now Pay Later) has been gaining popularity among payment solutions on the market. And although fintech projects continue to be leaders in offering deferred payments, more and more traditional banking institutions are also considering including this solution in their business strategy. Can they win on this? And who can help in the implementation of the service?

The deferred payment solution gained particular recognition during the COVID-19 pandemic, which influenced the dynamic growth of the e-commerce market, which in turn generated the need for new, more-affordable options for financing online purchases. In addition, COVID-19 caused a drastic increase in the group of financially insecure consumers who simply needed more flexibility in their purchases. The solution, which allows the deferral of payments for 30 or 45 days, and even spreads them into installments, was a perfect match for these expectations. It’s estimated that in the pandemic year 2020, Americans alone made purchases under deferred payments in the amount of 20-25 billion dollars.

How does it work?

The idea behind the BNPL service is very simple. BNPL allows the customer to order a product in an online store and pay for it later, in most cases without additional costs, after 30 or even 45 days. The customer usually orders a product in an e-shop, the shop receives immediate payment, and the customer settles the liability within 30 or 45 days. Payments can also be made in installments. The simplicity of the solution and the prospect of its dynamic development have resulted in more and more traditional banks, which are trying to gain a fair share in this rapidly growing market, seeing this service favorably. And there is a lot to compete for, because according to the estimates of Insider Intelligence, "the value of the volume of financial transactions within BNPL by 2025 will grow to an astronomical amount of USD 680 billion."

Twilight of credit cards

The second factor that may affect the decisions of financial institutions is the ongoing change in consumer habits in the use of payment solutions. Increasingly more users of e-commerce services began seeing deferred, often interest-free BNPL solutions as an attractive alternative to often very expensive credit cards.

In a study conducted by the analytical company The Ascent, as many as 62% of respondents expressed the belief that "BNPL is a solution that will completely replace a credit card in the future." Similar conclusions can be drawn after analyzing the results of research conducted by Insider Intelligence. When asked about the reasons for using deferred payments, 39.4% (the dominant percentage) of respondents indicated the desire to avoid paying with a credit card. Slightly less – 39% – answered that "the decision was dictated by the desire to buy products that they would not normally be able to afford." In addition, 16.3% of survey participants chose BNPL because they "didn't like using credit cards."

Everything indicates that along with the global expansion of BNPL, the volume of credit cards will systematically decrease. As the Payments Journal points out, in 2020 alone, the three largest banks in the United States recorded a more-than-20% decrease in the number of credit card purchases year-on-year. And this value decreases every year.

Advantages of BNPL

A factor that may be crucial for financial institutions when deciding to implement this solution is certainly the wide spectrum of users declaring their use of the deferred payment service.

As indicated by the analytical company The Ascent, although the service is used more often by younger consumers (over 60% for all age groups under 45), over 40% of consumers in the 55+ age group have used the deferred payment service at least once.

Another decisive factor may be the multiple benefits for people moving between different geographic regions. For these consumers, BNPL solutions can serve as an alternative to ones that require building a credit history in the consumer's new location.

Support tools: who to choose

Thinking about financial institutions that are looking for a tool to handle the purchase limit, at INCAT Ltd. we created a special BNPL module, which belongs to the “Lending” business line and is part of our flagship solution-  BOS core banking system. Our tool allows a financial institution to expand its financial services package and introduce a new product line without interfering with the current architecture.

The basic functions of the BNPL module in the BOS system include:

- managing payment terms within the agreed debt limit,

- installment purchases,

- spreading a group of purchases into installments,

- management of debt limits in the revolving loan model with the control of payment dates,

- creating payment schedules and managing deferred payment dates,

- management of commissions and interest,

- support for repayment calendars (annuity, real calendar),

- handling of repayments (directly or through dedicated accounts),

- the possibility of linking with card accounts and cards,

- handling overdue payments,

- accounting services for transactions and reclassifications.

An important element of the module is also the management of limits in the revolving account credit model, for which specific parameters can be defined, e.g.:

- loan repayment prediction based on current debt and transaction dates,

- the ability to define the frequency of repayments,

- possibility to postpone the due date of an installment by a predefined number of days,

- the possibility of linking fees and commissions with installment repayment dates,

- a full credit service in terms of handling late payments, reclassification, interest, and commissions for irregular payments,

- support for soft debt recovery.

BNPL is certainly a solution of the future, and it may become a tool for banks, allowing organisations to position themselves as a "responsible financial institution", which determines what the client can afford, educates its group of clients, and also helps its community to avoid overspending. The institutions that will be the first to understand this and adapt the solution to their business strategy will win in the market.