Buy now, pay later has shaken up the way that consumers think about how they pay — and borrow — for things. It’s also opened the door to a whole new class of competitor.
Today, about one in four U.S. adults indicate they have accounts with buy now, pay later platforms. The market could grow to $528 billion globally this year, representing growth of about 22%, according to Research & Markets. The same research indicates BNPL’s gross merchandise value could reach nearly $1 trillion by 2028.
Given the size and growth of this offering, it’s no wonder financial services organizations — beyond companies like PayPal, Klarna and Afterpay — are actively engaging their customers with it or making plans to do so.
However, financial services players should be doing more than just creating “me-too” BNPL approaches. They must pay attention to the customer experience delivered, not just the product itself, as it presents a unique opportunity to drive greater personalization through the customer journey and deepen relationships.
How Nonbanks’ BNPL Can Erode Bank Customers’ Loyalty And Engagement
When banking institutions offer BNPL services to their customers, or offer them through merchant partnerships, they can provide an additional layer of convenience and flexibility to their customers’ purchasing experience. This, in turn, can help the banks meet customers where they are, fostering stronger relationships, increasing customer satisfaction, and encouraging customer loyalty.
There are not many point of sale machines left without an offering from Klarna or Afterpay. If customers choose to use BNPL instead of their bank’s credit card, there is not only a negative impact to the card issuer’s revenue, it also exposes the customer to a new brand, which can result in the consumer using other products and services that aren’t affiliated with their primary bank.
Take Apple, for example. The company now offers a BNPL solution — Apple Pay Later, using its own balance sheet. Apple also offers a credit card, the Apple Card, and offers a savings account, Apple Savings, both in conjunction with Goldman Sachs. Apple’s financial products are connected, and offer a premium user experience. Apple’s savings account alone drew $1 billion in inflows in the first four days of the product’s availability and is of major interest to younger consumers. Couple this with BNPL, a credit card and a mobile experience that many rave about, and the value proposition for consumers can become quite high.
Read More about Apple in Financial Services:
- Enthusiasm for Apple Savings Account High Among Millennials and Gen Z
- Apple Card’s Newly Launched Savings Account Is Another Brick in the Walled Garden
Banks Can Use Customer Knowledge to Compete Via Personalization
In spite of such aggressive nonbank efforts, traditional institutions aren’t without advantages. Banks have more customer information about consumers than non-bank BNPL providers, giving them the opportunity to deliver a more personalized experience by leveraging their own data, especially if they are able to use those insights in real-time.
For example, say a customer wants to purchase a new iPhone and decides to pay for it over time through their bank’s app. The bank may be able to offer customized payment terms, against each customer’s credit profile. The bank could alter the product offering in real time instead of simply offering them the option of paying for the phone in usual four equal installments.
This is a win-win-win scenario — for the bank, the merchant and the customer — because it satisfies what the customer is looking for while leveraging the bank’s system, and the merchant gets paid.
Design and utility play key roles in any product’s success. Financial services providers are competing with fintech players who have been more nimble and customer-led versus being more product-centric.
Making Bank BNPL Competitive:
Paying close attention to design and personalization, through data, is paramount.
Banks that are able to offer BNPL services can combine the power of data and design while also incorporating responsible borrowing that reduces the risk of missed payments, promoting financial wellness.
Being transparent about how much the customer has outstanding from their BNPL transactions relative to traditional credit cards, as an example, is key. The bank can also offer suggestions for repayment or offer financial literacy programs to further support their customers’ financial health.
Read More about Buy Now, Pay Later:
- A Bright Future for BNPL Is in the (Bank) Cards
- Banks Getting Into BNPL Should Study CFPB Complaints First
- Why Consumers Don’t Think BNPL Is ‘Debt’ (and Why It Matters)
Assessing Today’s BNPL Customer Performance
Research shows that BNPL use is driven by payment schedule and number of payments, the number of retailers that accept it, having an existing relationship with the platform, and data security. Given these drivers, financial services players, and in particular banks with existing relationships, already have an edge over other, non-bank players.
Growth brings challenges. As more consumers adopt BNPL to manage their purchases, the risk of missed payments grows.
BNPL Offers Unsettling Odds:
More than four out of 10 Americans who have taken out a BNPL loan have made a late payment, according to 2022 research by LendingTree.
A 2022 study by the Consumer Financial Protection Bureau found that 10.5% of unique users were charged at least one late fee in 2021, up from 7.8% in 2020.
For any financial institution offering BNPL, such statistics pose significant implications. First, the institution has to manage the collection of payments, and while much of this can be automated today, it still costs money and reduces efficiency. In addition to this, bank profitability is impacted when customers miss payments or don’t pay at all — research indicates that some BNPL buyers never begin their repayment plans.
For the customer, being declined for a BNPL transaction by their bank because they missed payments can impact the bank-customer relationship, forcing the customer to go somewhere else. In addition, missed payments could impact the customer’s credit score, which, in turn, further impacts their ability to get credit at preferred rates or to access lending products at all.
Would-Be BNPL Lenders Must Tread Realistically
As market dynamics shift and financial headwinds impact consumers, more customers may choose BNPL solutions to buy everyday products. Recent research indicates that one in five consumers are using BNPL to buy groceries.
As a result, banks should seriously consider embedding financial wellness insights into their BNPL offerings from the start. At a minimum, leveraging existing data, along with adoption of artificial intelligence and machine learning algorithms, will help banks help their customers make better purchasing decisions.
About the author:
Bill Staikos is senior vice president, executive advisory, at Medallia.