Contrary to popular belief, alternative payments are not a new concept in the payment world. They have quickly become a prominent part of the global payment ecosystem. These include digital wallets, peer-to-peer lending platforms, and various other disruptive technologies.
One of the most prominent options in the alternative payment space is buy now pay later (BNPL). The concept allows consumers to pay for their purchases in several regular instalments. Due to the growing popularity of this payment option, many banks have started to divert their revenue streams away from this space.
Aside from the ability to process payments, digital payment products such as those using BNPL can also be offered through embedded finance, which is a type of financial service typically not offered by banks or financial institutions. This segment has seen considerable growth due to the rise of online shopping during the pandemic.
BNPL in current times
The goal of the BNPL model is to make it easier and more transparent for consumers to make alternative payments. One of the largest players in the space is Sweden-based Klarna, which has around 90 million active users globally. Other players, such as Afterpay and Zilch, are also seeing strong growth.
The rise of e-commerce during the coronavirus pandemic has made it easier for consumers to shop online. This has also attracted younger consumers and those looking for new jobs. With the option of paying for their purchases in instalments, these consumers are also more likely to shop online.
With the ability to process payments through various platforms, including BNPL, merchants can now compete with their traditional counterparts. While the fees associated with conventional card programs are higher, the average order value can increase by up to 40% by using a BNPL platform. The effects of the pandemic will continue to significantly impact the payment industry. As more financial institutions start looking at acquiring alternative payment platforms, now is a critical time for companies to prepare for the future.
What to watch
Because the popularity of alternative payments has grown, many companies are now focused on expanding their reach beyond just fractional payments. Several developments are expected to disrupt the payment industry in the coming years.
One of the main strategies financial companies are implementing to attract more consumers is using their brand's front-end marketing. For instance, with the help of retailers, they can create a personalized marketing campaign. Through in-app marketing, financial institutions can also create personalized shopping experiences for their consumers. This strategy can be achieved by using various marketing tools, such as advertisements and recommendations. Another area that's expected to see significant growth is the development of next-generation credit checking. Due to the rise of late fees, it's essential that the platforms that process credit checks continuously improve their systems.
Aside from e-commerce, BNPL also goes beyond the traditional payment space by developing new consumer sectors. For instance, in the travel and ticketing industry, consumers increasingly use fly-now-pay-later and eat-now-pay-later.
As payment processing software providers such as Square, Venmo, and Stripe expand their reach,BNPL firms are also looking to capitalize on the opportunities by developing their own end-to-end payment gateways. Instead of just processing credit and debit card payments, they're also looking to process regular card payments.
In addition, companies are also looking to provide their customers with a wider variety of payment options, such as credit and non-credit. For instance, in Japan, the payment processing service of BNPL partnered with Visa to create a seamless shopping experience for its customers.
Alternative payment resiliency
The acquisition by finance giants of PayPal, Visa, and Paidy is an example of how the payment industry is expected to evolve. It shows how mergers and acquisitions are becoming more frequent to maintain their competitive advantage.
One of the ways companies are building resilience is through partnerships. In the Philippines, for instance, ride-sharing company Grab partnered with Citi to expand its reach. In Kenya, M-Pesa, which started in 2002, has revolutionized how people send and receive money.
The rise of the consumer is driving the evolution of the payment industry. As a result, companies must keep up with the changes in the market and develop resilient products and designs. Doing so will allow them to remain competitive and provide their customers with a better experience.