One of the most controversial aspects of consumer finance is credit. When new products appear in the market, they are often met with scepticism. However, due to the pandemic, the buy-now-pay-later (BNPL) concept has become mainstream. BNPL is a new layer in the credit space that aims to provide consumers with a more streamlined way to pay for goods.
Who uses BNPL the most?
The concept of paying in instalments is gaining popularity among younger consumers, who are more likely to be cautious about credit card debt.
BNPL has also gained acceptance beyond the younger demographic. Early players such as Afterpay, Affirm, and Klarna face competition from established companies such as AmEx and Paypal. Ultimately, Gen Z and Millennials are most likely to use the service due to the growing number of companies offering pay-by-card options. With the growth of BNPL expected to reach over $1 trillion in transactions by 2025, it is wise to take a deeper look at the business model behind the platform.
BNPL business model
Unlike a traditional credit card, which is typically linked to a bank or credit card company, BNPL transactions originate from the consumer and the merchant. Over the past 15 years, several start-up companies such as Affirm, Afterpay, and Klarna introduced a new payment method that allowed consumers to pay for goods and services with their debit cards. The boom in e-commerce has now made this model mainstream. BNPL companies typically recover between 5% and 6% of the transaction value in fees from retailers. However, when retailers see repeat customers using the platform, they are willing to make a trade-off.
The fees associated with using a BNPL platform are typically higher than those involving a traditional credit card. However, as the consumer and the merchant have different purchasing habits, the fees vary.
The main objective of the BNPL pitch for merchants is to reach out to the next generation of consumers, who are more budget-conscious and less likely to have credit card debt. Most of the time, the platform offers a fixed amount and multiple payment periods.
Most consumers using the platform use their debit cards instead of credit cards, which suggests that they are more budget-conscious and less likely to have credit card debt.
Innovation in the BNPL business model
The BNPL platform is based on banking and payment processing. Unlike traditional credit cards, which have a processing fee of around 3%, the cost of using BNPL is typically around 4%.
The value merchants receive from the BNPL platform is higher than that of a traditional credit card. The platform functions as both a customer acquisition channel and a retention mechanism.
According to a recent report by Forrester, BNPL can help to boost the conversion rate and increase the average order value for merchants. The long-term success of BNPL will largely depend on the performance of its loan book and the corresponding changes in its default and credit limit policies.
What BNPL offers to merchants and customers
The BNPL platform allows consumers to pay for their purchases from their favourite retailers in instalment payments, which are typically interest-free. BNPL can also help merchants retain existing customers and increase their average order value, while it can also help them attract new customers by providing them with a variety of payment options.
The younger demographic has generated most of the early-stage traction for BNPL. As the market has expanded, the number of older consumers using the service has also increased.
Most of the engagement with the platform occurs on the dedicated apps, which are linked to the bank cards used by consumers. As the number of providers and retailers supporting BNPL increases, there are also more channels they can use to reach and retain customers.
Most consumers pay no fees on the purchase made through BNPL as long as they make their payments on time. On the other hand, merchants are charged a particular amount depending on the retail transaction value.