Let’s face it. When is the last time an average person could purchase anything without paying in full but avoid fee (1) or finance charge? Back when layaways were a thing, retailers did not allow customers to take the merchandise home until they paid in full. Credit cards offer a no interest period for those lucky few who can pay off the entire balance every month (2). For everyone else, pay now or pay finance charge.
Now Buy Now Pay Later (BNPL) providers have arranged for customers to have their cake and eat it too. Users can usually pay for a merchandise with 25% down payment and the remaining amount in three equal future payments using their credit or debit cards, usually over a period of 6 weeks. No fee or finance charge (1). It is that simple.
I believe BNPL is one of the best innovations in lending in recent times. We just need to tweak it around the edges to make it even better for everyone.
For the Merchant: A familiar solution with fewer downside
Merchants have always paid a fee to financial institutions (FI) in exchange of providing credit to their customers. The financing vehicle at point of sale (POS) used to be mostly credit card. Credit applications were cumbersome and needed expensive change in merchant’s POS system.
BNPL solutions require minimal technology integration. Merchants get upfront payment and lift in sales by providing credit.
The opportunity is in making BNPL more ubiquitous in physical POS. Social distancing will be over at some point and people will go back to store. Coronavirus has increased availability of contact free payment options at physical POS. A seamless interface leveraging virtual card or QR code between BNPL apps and mobile wallets can remove the friction at POS and take BNPL to physical retail.
There is much more room to grow if BNPL providers start integrating with neighborhood small businesses (hair extension anyone?). To reach the last mile, integration with POS and mPOS software providers will be needed.
For Consumers: Budgeting with transparency and control
Consumers craving control and transparency had very little of either while using credit at POS. Credit cards usually do not allow consumers to choose which transactions to pay over few months vs. pay off immediately - it is usually an all or nothing proposition (2). Interest calculations based on average daily balance are impossible to follow.
BNPL provides consumers a convenient solution with transparency. It is a great budgeting tool and people love it.
There is room to improve consumer experience which often feels a bit clunky. Some BNPL experiences take the user to a different page, in some cases user has to re-enter the information already shared with the retailer. To augment the budgeting aspect, apps can provide view of all BNPL purchases over time, current balances, next payment due - especially for consumers using BNPL across multiple merchants with repeat purchases.
I would love to see a BNPL provider offer bank account with debit card so that consumers can have an integrated view of their entire budget.
Everyone Else: It is time to accept the future and play your part
I have heard from some of the large Financial Institutions that BNPL providers are not great for consumers. In Dec. one large credit card provider specifically prohibited BNPL transactions because of risk.
I don’t buy it. The cardholder has an approved credit line and they should be able to use it as they want. Buying a $120 sweater on a credit card vs. placing four transactions of $30 on the same credit card every two weeks are not that different from credit risk perspective. Except that the card holders can avoid paying interest in the second case by stretching the payment obligation.
Many FIs are prisoner of their existing business model of products like credit card which often has highest ROA in retail banking. Their customers want flexibility, control and freedom from getting into debt for every day purchases. It’s time that FIs provide BNPL as a feature with their cards and merchant network.
With reinvigorated CFPB we can anticipate more regulatory scrutiny on consumer financing, but BNPL should largely pass with flying colors. There is opportunity to improve customer rights, e.g., aligning start of payment with order shipment, ability to cancel payment for dispute with merchants. Payment networks should work to tweak chargeback rules.
There is also discussion about lack of credit bureau information for consumers holding these micro loans. This needs more thoughts as the loan size and duration make it immaterial for traditional bureau reporting. All parties can agree on a threshold for debit card users for bureau reporting. I would argue that credit card BNPL users require no additional reporting.
In conclusion, the future is here and consumers have embraced it. It's time to accept that BNPL is here to stay and improve the product for everyone.
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Footnote
(1) Some BNPL providers charge a late fee for missed payments.
(2) Most credit cards revoke card holders’ access to interest free grace period for all transactions when card holders do not pay their balance in full. This is partially the result of how credit card balance is calculated. Technology exists to allow issuers to separate one or more transactions into revolving and the remainders in non-revolving, interest free bucket.
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