Buy now, pay later (BNPL), also known as point-of-sale (POS) lending or POS financing, is not a new trend, but it is a rapidly expanding e-commerce payment option trend. It is especially popular among younger consumers, like Millennials and Gen Z.
Why?
Consumers are looking for flexible financing options, especially interest-free, because of the financial hardships brought on by COVID-19.
Today, consumer financing goes beyond installment loans with promotional interest rates and traditional credit card providers. Financial technology (Fintech) platforms offer flexible payment options, like buy now, pay later, which is very attractive at the point-of-sale on a product page. This evolution has mirrored the consumers’ shift from physical brick-and-mortar shopping to online shopping.
Fintech startups with POS lending reported up to triple digit growth in summer 2020. Affirm’s IPO filing revealed that 30 percent of its revenues are generated by Peloton sales. In Q3 2020, Peloton sales surged 66 percent as more buyers were able to finance their at-home workout system with interest-free payments through Affirm.
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. Over the past few years, as these offerings have become more commonplace in e-commerce, the option to buy now, paylater is no longer a “nice-to-have” for consumers, but an expectation.
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 buy the item.
In an interview with The Financial Brand, TransUnion’s SVP and Head of Card said, “Point-of-sale finance is a new application of an old idea. And you’re going to see, at the point-of-sale, more traditional lenders come up with competitive offerings.”
With BNPL consumers get instant gratification. There’s a reason that Afterpay has dubbed their buy now, pay later offering “enjoy now, pay later.”
As with any technology or offering, BNPL comes with challenges from strategy, to execution, to growth.
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.
Managing merchant integration. Partnering with established POS lenders or white-label technology providers to originate loans is the lowest barrier to entry into 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, according to the McKinsey Digital Commerce Benchmark. Strong partnerships with retailers and merchants, as well as the ability to integrate across different e-commerce platforms are crucial for long-term success.
BNPL implementations by traditional lenders have ranged from white-label partnerships with existing platforms, to building and launching custom platforms.
A white-label platform enables banks to make BNPL available quickly to diversify their loan portfolios. Fifth Third Bank, Regions Bank, and Synovus Bank have done this with GreenSky, a financial technology company.
However, the long-term payoff comes from a custom platform implementation. Citizens Bank’s partnership with Apple for their iPhone upgrade financing program disrupted the telecommunications industry and helped Citizens build a national footprint. The benefits include increased brand awareness, revenue, data on consumer preferences, and opportunities for new partnerships.
Developing a 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. Proper marketing segmentation will need to be applied to this type of consumer who may not necessarily be interested in the services you offer. Most likely, these customers will fall into behavioral segmentation based on their purchasing habits.
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 disrupted the telecommunications industry by offering consumers a better option for immediate upgrades. No longer are consumers obligated to remain in a two-year iPhone contract with the same phone. 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 in online shopping carts, according to 99 Firms. Can this number shrink with expanded BNPL options?
Solution: Find gaps in customers’ needs with user-centered research.
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, according to McKinsey’s US lending at point of sale: The next frontier of growth article. This is well before payment is made — which means that a lender’s finance offering must be consistently integrated with the merchant’s 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 merchant can deliver a satisfying experience if both the product and payment option are what the customer needs.
Solution: Develop a custom back-end platform integration.
With at least 49% of US consumers beginning their product search on Amazon, 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. According to 99 Firms, 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.
Solution: Create a frictionless consumer buyer’s journey with UX/UI design implementation.
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 requires effective behavioral and psychographic segmentation across digital channels, especially because new customers may be more loyal to the retailer than the lender.
Solution: Deploy personalized, data-driven marketing campaigns that drive brand loyalty.
Whether you are looking to build a white-label or custom BNPL integration, WillowTree can help expand your consumer financing portfolio to include BNPL. Get in touch with our team today to find out how your lending options can go beyond traditional.
Editor’s Note: This post was originally published on November 4, 2020. It has been updated to include the three reasons why buy now, pay later should be in every traditional lenders’ consumer lending portfolio.
