Amidst the backdrop of the pandemic, ecommerce has experienced a wave of activity as people flocked online to purchase goods, as opposed to going in store. This surge in online purchasing also benefited the new form of payment style, buy now, pay later (BNPL). Over the past year, the use of the payment method, which allows customers to purchase items without any cash exchanging hands until they’re certain they want to keep the goods, exploded. By March 2021, the number of US consumers that had heard of the payment method stood at 56%, up from 38% in July 2020. A February 2021 survey found that nearly 40% of US consumers had used the payment method and that global use of BNPL is expected to double by 2025.
These are growth numbers that almost any industry would love to experience. But it also comes with potential threats, like regulation designed to reduce BNPL use. It’s easy to understand why regulators would have a close eye on the strategy and BNPL companies. By offering to give consumers the chance to receive something without paying for it, only to expect payment weeks later, it can create the belief that customers will go into deep debt without even knowing it.
There’s a solution for these concerns, which BNPL and fintech firms have access to, and that’s data. With the right data, and the proper analytic tools, companies can put these concerns to bed by making sure only the right people — those that will pay back later — qualify for BNPL.
Merchants partner with BNPL, which is introduced early in and integrated across the customer buyer journey
Merchant backend integrates with consumer browser and BNPL payments API. Customer data shared by the merchant via API improves conversion rates
Checkout page offers BNPL as a payment option and outlines terms of payment
Payment session created via API with merchant. BNPL conducts a pre-assessment to establish proposed payment terms
Customer verifies identity details including phone number and email address
Identity verification and authentication performed with SMS OTP and Email OT. Native BNPL app users can bypass auth with Face ID or pin code
Customer directed to a hosted payments page to receive authorization by providing credit card details
BNPL conducts customer risk assessment to offer a line of credit and either provides an authorization token or declines payment authorization
Customer confirms the order and is redirected to the merchant’s URL with an order ID and post-purchase UX
BNPL captures the payment from the merchant; authorizations on transactions have a default expiration after 28 days
Fixed transaction fees and variable percentage fees of 4-6%
Late fees on installment payments and an APR on missed payments for “No Interest If Paid in Full” promos
Interest income from lending cash residing in customer accounts to institutional investors
The Popularity Boom
For now, regulators have hesitated to address BNPL directly. But that can change, and in the United Kingdom there are already discussions that have grown around the payment method. The UK’s Financial Conduct Authority (FCA) has begun to look into the idea of adding restrictions to the companies offering BNPL access after it determined that 10% of consumers using BNPL had accounts that were overdue. A former FCA head suggested that BNPL tools should fall under credit rules within the country, forcing stricter credit and affordability checks. How those checks take place could reduce the ease of BNPL payments.
In Australia, the country has not moved forward with regulations, and instead relies on the Australian Finance Industry Association to self-govern. This has added some rules that strengthen consumer protections beyond the laws of the country. But it hasn’t resulted in government oversight.
It’s still early in the BNPL growth cycle, hence regulators’ hesitancy. Yet, the more that consumers use the service and the higher the default rates on the payments, the more likely regulators will come knocking. Credit Karma found that 38% of BNPL users have missed at least one payment in the US and 72% said the missed payment impacted their credit score. The more consumers struggle to pay back the interest-free loans, the bigger impact on credit scores and higher debt loads. This would push regulators to step in and codify protections.
And consumers are starting to recognize the value. BNPL provider Afterpay reports that 91% of users are repeat customers. It reflects a larger trend, as 85% of consumers that have used BNPL plan to do so again. Why? Some of the simple reasons include:
One reason that retailers like BNPL: they see a boost in orders (i.e., conversion rates). Major BNPL provider, Klarna, notes that embedding their BNPL payments solution leads to a 44% increase in orders and a 68% increase in order volume.
Another reason that retailers like BNPL: because it allows for less cash to exchange hands on items that may be returned. So a clothing ecommerce store can wait until the customer actually chooses to receive, try on, and keep clothing before exchanging funds. Yet, it protects the business from fraud that could occur from the online transaction.
Data Provides The Solution
But for all this to work, it relies on the simple fact that the companies offering BNPL must have the right data to properly identify whether someone has the capability to purchase an item and pay it back, while delaying the actual exchange of funds. Without that clear picture of the user, then companies can’t determine effectively which customers lack the means to afford an item, who has a history of not paying back later, and who simply isn’t who they say they are.
The clear picture also ensures that people who can — and will — pay back the funds will not get looked over, due to a variety of reasons, whether it’s a lack of traditional financial data points, a minor credit concern from the past, or even more underlying discriminatory practices.
This speaks to the value and breadth of data available. The best BNPL providers will use alternative and traditional data sources in order to approve or disapprove of a buyer. The better the data, the more likely that they can determine whether a user will truly pay later.
By having an inability to see those that won’t pay back and not capturing those that will, the rate of BNPL failures will continue to rise. With that, the rate of regulation will also rise. If that regulation comes too strong, then it can effectively halt the growth that BNPL experienced through the pandemic and in the recovery.
That’s not something the sector needs to see, now or later.