Buy Now Pay Later (BNPL) – What’s Different?

The payment industry has recently seen rapid growth in a mode of payment called BNPL or Buy Now Pay Later. BNPL has emerged as a new mode of payment especially across digital channels, where buyers are given the option to purchase goods / services and pay later in easy instalments.

This payment mode has shown a very high rate of growth over other methods, such that we recently had a BNPL player in Australia being bought at USD 29 Billion!!! With valuations soaring, the segment has seen mushrooming of various players globally in BNPL.

So, how is BNPL different from say a Credit Card or other forms of lending?, lets us look at below: -

1. BNPL is the most digital native solution, as it weaves well into the online checkout experience while making a purchase, with Quick onboarding (digital and alternative data sources driven), payments and checkout.
2. BNPL in a way expands the credit market by offering credit to customers who are New to Credit (NTC). This in a way has been a good way to expand in segments like Women users (especially developing world), Students etc. BNPL has therefore served as a step-up product for these NTC profiles.
3. While BNPL can expand the market, they can also cannibalise on other lending options.
4. Most BNPL products are of low value with tenures from 15 days to 3 months range. Both the ticket size of loans and tenures is gradually expected to move up as segment grows.
5. For the merchant, BNPL enables increased conversions, expanding client base (affordability) and better checkout experience. BNPL also helps migrate from risks associated with Cash on Delivery (COD) for merchants.
6. There are many providers in the ecosystem viz. Non-Banks (NBFC’s), Card Cos, Card Networks & Banks. They have some variations to the product, though overall concept is same.
7. Payment aggregators also provide BNPL as an option based on their tie ups.
8. Many BNPL providers are also extending their solution as a White-labelled platform to merchants and even banks.
9. Partnership is very key to this segment as volumes are driven by Tie ups with Merchants & Products.
10. BNPL does away with traditional payment systems, thereby operationally benefiting merchants and also reduce costs.
11. Merchants / Product cos. pay a charge on the transaction (usually a %) to BNPL companies for processing. There is usually also some charge / penalty / interest charged on customers if he misses the pay later dates.
12. There are BNPL products being offered by banks at physical POS too.
13. While BNPL players evolve their understanding of users through alternative data and building their own user base over a period. It makes sense especially for B2C BNPL players to get into areas like loyalty and creating personalised marketplaces / offers for customers.
14. Being a payment linked digital lending product, besides Credit Risk BNPL includes Fraud Risk too.
15. Though BNPL is growing faster, a recent report by FT Partners, shows that it is currently at 2.1% of overall ecommerce payments, and will grow to 4.2% by 2024. This makes it the 6th most used option besides Wallets, Credit Cards, Debit Cards, Banks & COD.

While the BNPL segment is not huge in market share, but it scores w.r.t. being wedded to the digital ecosystem and serving as a step-up product for NTC. There are operational and cost benefits too as the ecosystem as they offer both payment and lending together. Also, being a part of digital ecosystem with alternative customer data, BNPL players can morph in true blue B2C players by expanding into loyalty and creating offers and marketplaces of their own.

This is what makes the BNPL segment and players attractive.