The State of BNPL
Buy-now-pay-later (BNPL), also known as point-of-sale (POS) lending, or POS financing, is not a new trend, but has been expanding rapidly as an eCommerce offering during the COVID-19 pandemic.
What began as in-store installment loans with promotional interest rates has now evolved into online offerings of deferred debit with no interest, heightening competition with traditional payment forms while introducing even less financial risk or downside for the customer. This evolution has mirrored the shift of more consumers shopping online, and expanded the playing field beyond credit card providers and banks to financial technology (Fintech) platforms as well.
Fintech startups providing POS lending reported up to triple digit growth in summer 2020. Affirm, for example, partners with Peloton to provide deferred debit financing, no doubt helping Peloton sales to surge 66% in Q3 2020 as more buyers were able to finance their at-home workout system in installments, without having to pay interest. Indeed, Affirm’s IPO filing revealed that 30% of its revenues are generated by Peloton sales.
Banks’ offerings of BNPL have ranged from partnering with technology platforms, to building and launching their own platforms. Using a white-label platform, as Fifth Third Bank, Regions Bank, and Synovus Bank have done with GreenSky, enables these banks to make the offering available quickly, while diversifying their loan portfolios. But the long-term payoff in the form of brand awareness, revenue, data on consumer preferences, and opportunities for new partnerships comes with custom offerings — as exemplified by Citizens Bank’s partnership with Apple for their iPhone upgrade financing program, which disrupted the telecommunications industry and helped Citizens build a national footprint.
Over the past few years, as these offerings have become more commonplace in eCommerce transactions, the option to buy-now-pay-later is no longer a “nice-to-have” for consumers, but an expectation.
Why This Trend?
TransUnion’s SVP and Head of Card calls the current BNPL trend “a new application of an old idea,” with consumers wanting to quickly and conveniently make large purchases without assuming high credit risk or having to pay interest on the purchase via credit cards.
Research from Citizens Financial Group indicated that 76% of consumers would be more likely to make a retail purchase if an easy and simple payment plan was offered at the point of sale.
When considering BNPL through the lens of the consumer, it becomes clear why these financing options continue to compete with credit cards and other payment forms. Consumers don’t open lines of credit to have credit, they do it to buy things. If a consumer has to choose between getting a new credit card in order to pay for an expensive item in full, or getting the item right away with a payment plan, the latter aligns most closely with the “job” the consumer wants to get done, which is to get and have the item.
With BNPL consumers get instant gratification. There’s a reason that Afterpay has dubbed their buy now, pay later offering “enjoy now, pay later.”
What are the Benefits of BNPL to Providers?
Whether financial institutions enter the BNPL marketplace by partnering with POS lenders or building their own end-to-end solutions, there are clear benefits to providers.
1. More brand awareness & new customer acquisition
The obvious benefit of offering BNPL is acquiring new customers — and prime customers, at that. Estimates indicated that in 2019, around 55% of origination volume for POS financing was expected to be from the prime segment (consumers with credit scores above 680). The degree of access to those customers and opportunity to build LTV will depend on the degree of the providers’ integration into the customer journey.
2. Increased share of wallet of existing customers
Similarly to the above, another obvious advantage when existing customers originate new debit or credit via BNPL is gaining more wallet share of these customers. The benefits of this for the financial provider will depend how effectively you are able to connect data between products.
3. Meet the customer at the point of value
A strategic benefit of offering BNPL is that you are able to provide the customer with exactly what they want at the time and place that they want it. Indeed, as PYMNTS.com says, “We’re all heading towards a future where buying things and getting paid is going to catch up and meet in the middle.” The providers who are able to be at that middle point, giving the customer the option to easily get the product that they want, will reap the benefits of this future state.
What are the Challenges of BNPL to Providers?
As with any technology or offering, BNPL comes with challenges from strategy, to execution, to growth.
1. Limited margin for error
Offering financing at the point of sale means that your bank’s brand will be held to the same standards of whatever the consumer product’s brand is that you are helping to finance. In an interview with American Banker, Citizens Bank’s Head of Consumer Banking said of the Apple partnership: “We knew going in with Apple that there was no margin for error in the customer experience…we needed to create an instant, Apple-like experience across all channels.” Executing against the standards of CX leaders like Apple or Amazon can be difficult, though rewarding.
2. Managing merchant integration
Partnering with established POS lenders or white-label technology providers to originate loans is the lowest barrier to entry in BNPL, but limits potential payoff. Conversion rates of POS lending vary by depth of integration in the experience — with full scale integration across the customer journey leading to 2-3x conversion rates compared to minimal integration only at checkout. Strong partnerships with retailers and merchants, as well as the ability to integrate across technologies, are crucial for long-term success.
3. Unique strategy to build customer loyalty and grow LTV
Unlike traditional loans, prospects who become customers via BNPL financing did not become customers by actively seeking out a financial services provider, but rather by seeking out a retailer or merchant that happened to be partnering with a financial services provider. Therefore, the product and marketing strategy to build loyalty with these customers must be clearly segmented from other customers that have already bought into your value proposition to some degree.
How to Execute BNPL the Right Way
1. Identify gaps in the value chain
Uncovering the biggest opportunities for product innovation requires looking for gaps between how something is today, and how a consumer might want it to be in the future. The Citizens-Apple partnership, for example, disrupted the telecommunications industry by offering consumers a better option than being stuck in a two-year iPhone contract, when new iPhone models are released less than every two years.
There are plenty of similar gaps across the consumer segment, particularly in the travel, finance, retail, and non-profit industries, as well as the B2B sector. Each year, about $4.6 trillion worth of merchandise is abandoned via eCommerce — could that number shrink with expanded BNPL options?
The best way to find gaps in the experience for consumers is to conduct user-centered research aimed at uncovering user needs that are not being met. Get in touch with a strategist to learn how WillowTree can help you uncover these needs.
2. Seek out partnership opportunities
Full-scale integration with the merchant and retail partners is the cornerstone of effective BNPL. About 75% of buyers who finance large purchases decide to do so early in the customer journey, well before they actually go to pay — which means that lenders’ financing offering must be consistently integrated with the merchants’ product offering, across both physical and digital channels. These partnerships only work if they are mutually-beneficial — and if the value propositions for each brand are well-aligned, the lender and the merchant can deliver a 1-2 punch of both the product and payment that the customer wants.
Comprehensive systems integration requires top-notch backend engineering expertise. Talk to a WillowTree developer about important considerations for your technical architecture.
3. Execute like a retailer
With at least 49% of U.S. consumers starting on Amazon to look for new products, it’s safe to say that most retailers are held to a high standard for CX, which means that the POS lender must deliver against those standards. Estimates show that 26% of shoppers have abandoned online purchases because they say the checkout process is too long or complicated, and another 34% because they had to create an account to complete the checkout — too many additional steps to secure a financing option will only add friction to the experience and reduce conversion.
Making experiences frictionless is all about the UX/UI design. Talk to a WillowTree product designer to learn how our integrated design approach creates elegant and engaging digital products.
4. Expand and grow customer LTV via segmentation
Full-scale integration between merchant and lender not only improves the CX, but also the lender’s ability to build loyalty with new customers acquired at the point of sale. Building LTV will require effective behavioral and psychographic segmentation across digital channels, especially as new customers may be primarily more loyal to the retailer that they bought from than the lender.
Talk to a WillowTree growth expert to learn how we can help you deploy personalized, data-driven marketing campaigns that drive brand loyalty.
Across every stage of the digital product lifecycle, from strategy, to execution, to growth, WillowTree can help you deliver the experience your customers want and expect. If you are a financial services provider interested in building a BNPL offering, integrating with a merchant or technology platform, or simply growing your customer LTV, get in touch with our team today.