Dynamic growth of BNPL services

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

The deferred payment solution gained particular recognition during the COVID-19 pandemic, which affected the dynamic growth of the e-commerce market, which in turn generated the need for new, cheaper 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 postponement of payments for 30 or 45 days, and even distributes them in installments, perfectly suited these expectations. It is estimated that in the pandemic year of 2020, Americans alone made purchases under deferred payments for 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 at no extra cost, after 30 or even 45 days. The customer usually orders a product in an e-store, the store receives immediate payment, and the customer settles the liability within 30 or 45 days. Payments can also be made in instalments. The simplicity of the solution and the prospects for its dynamic development have resulted in more and more traditional banks, trying to get a fair share in this rapidly growing market, seeing this service positively. And there is a lot to compete for, because according to the estimates of Insider Intelligence, “by 2025, the value of the volume of financial transactions within BNPL will grow to an astronomical amount of USD 680 billion”.

Twilight of credit cards

The other factor that can influence the decisions of financial institutions is the ongoing change in consumer habits when using payment solutions. More and more users of e-commerce services began to see deferred, often interest-free BNPL solutions as an attractive alternative to often very expensive credit cards.

In a study carried out by the analysis company The Ascent, a whopping 62% of those questioned 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 payment, 39.4% (the dominant percentage) of respondents indicated the desire to avoid paying by credit card. Slightly fewer – 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 together with the global expansion of BNPL, the volume of credit cards will systematically decrease. As Payments Journal points out, in 2020 alone, the three largest banks in the US recorded a more than 20% year-over-year decline in credit card purchases. And this value decreases every year.

Benefits of BNPL

One factor that can be decisive for financial institutions when they decide to implement this solution is certainly the wide range of users who declare their use of the deferred payment service.

As suggested by research 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 aged 55+ have used the payment deferral service at least once.

Another decisive factor may be the many advantages for people moving between different geographical regions. For these consumers, BNPL solutions can serve as an alternative to those that require building a credit history in the consumer’s new location.

Support tools: who to choose

Considering financial institutions looking for a tool to manage the purchase limit, we at INCAT Ltd. created a special BNPL module, which belongs to “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 suite and introduce a new product line without disrupting the current architecture.

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

– manage payment terms within the agreed debt limit,

– installment purchase,

– spread a group of purchases in installments,

– management of debt limits in the rolling loan model with control of payment dates,

– create payment plans and manage deferred payment dates,

– management of commissions and interest,

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

– handling refunds (directly or through dedicated accounts),

– the ability to connect 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 forecast based on current debt and transaction dates,

– the ability to define the frequency of repayments,

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

– the possibility to link fees and commissions with installment dates,

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

– support for soft debt collection.

BNPL is certainly a solution for the future and it can become a tool for banks, allowing organizations to position themselves as a “responsible financial institution“, which determines what the customer can afford, educates their customer group, and also helps society 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.