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By · July 04, 2022
5 minute read

BNPL disruption: what comes after the first wave?

sea waves crashing on shore at dusk

BNPL, or buy now pay later, is a relatively new, alternative payment method that allows shoppers to pay for goods and services over a period of time rather than at the point of checkout. BNPL providers like Klarna enable consumers to acquire items they may not be able to afford all at once. This avoids them taking on debt, such as a loan or credit card.

In 2020, the global BNPL market size was valued at over USD 90 billion. The market has a projected 45.7% compound annual growth rate, with a forecast value of USD 3.98 trillion by 2030.

BNPL services allow the consumer more flexibility with payments. This gives them to choose an affordable financing plan and spread the cost of various items. They also provide this flexibility to consumers with poor or no credit, opening up an often marginalized market of consumers.

BNPL providers often offer two types of payment plans:

  • Installment: this is the most common form of BNPL in the USA. People can make payments against their balance either bi-weekly or monthly. Most of the time, this requires a down payment at the time of checkout.
  • Invoicing: this is where a person can check out without paying a deposit. They then have to pay the total balance in a lump sum within a set time, usually 14-30 days.

Currently, we’re only seeing the first generation of BNPL. Continued disruption will take effect across ecommerce checkouts and, more broadly, across consumer payments and lending.

Expansion of BNPL

The next generation of BNPL is coming. We can look to the pioneer, Klarna, to see many of the differentiation and business model expansion ideas of pure BNPL providers.

Klarna offers:

  • a general virtual card or wallet, compatible with all standard checkouts even when the merchant is not pre-partnered
  • a greater mix of lending and payment options based on context, eligibility, and consumer choice
  • point-of-sale partnerships to offer shoppers BNPL options at physical checkouts

Companies like Klarna are also looking to expand the capabilities of the BNPL provider’s app. New features will help with receipts, personal finance reports, and budgeting, as well as create richer shopping features.

These features may include:

  • loyalty schemes
  • offers and coupons
  • returns and order management
  • selling of used/unwanted goods

Beyond ecommerce

There are many areas for BNPL providers to expand their offerings beyond retail ecommerce.

Wherever you have higher-value orders – e.g. holidays, flights, or cruises – providers could offer their services to allow the consumer a little breathing time between purchase and payment or break the payments into more affordable chunks.

BNPL services could also expand to areas where people are looking for a more frictionless payment experience and can use identity as an alternative to a traditional checkout.

For example:

  • gas stations
  • road tolls
  • grocery shopping
  • school and campus purchases

There is also space for BNPL where customers enjoy the value of services/experiences spread out over time, but previously payments have been required up-front, for example:

  • season tickets
  • leisure memberships
  • sports memberships

Where people need to pay for costly items quickly and will benefit from the ability to spread the cost for things not covered by insurance, such as:

  • health and dental treatment
  • automotive repairs
  • funerals

BNPL may also expand into commodity purchases where the retailer can use more accessible PoS financing as a differentiator; for example, computers and electronics, home white goods and furniture, and home energy installations.

The bank-ification of BNPL providers

Newly established B2C players will look to grow via partnerships to white-label their services and eventually offer parts of their solution in a more directly accessible Banking as a Service (BaaS) model.

The gradual tightening of regulation and standardization of new aspects of the credit system will lead to consolidation and economies of scale; this also offers an opportunity for more traditional lending and banking services to plug into the industry as upstream providers.

BNPL services with lots of customers will likely be looking to build out their standard banking and payments services going forward, which will lead to more demand for BaaS partnerships.

Wallet-ification of banks

Klarna and other BNPL pioneers are positioning themselves as full-spectrum shopping apps. This builds a new dimension of usefulness/value-added to the idea of a digital wallet, where previously, accounts like PayPal or mobile payment wallets lacked particular features to encourage user engagement or brand stickiness. People wouldn’t necessarily have brand loyalty, but providers attempt to remedy this.

As BNPL providers amplify their integration with people’s shopping and spending, we would expect to see regular banks re-thinking Personal Finance Management, receipt data, retail brand partnerships, loyalty schemes, and similar to re-energize the idea of banking app engagement and community.

Contextual savings reverse use case

Finally, we have to look at how this has shifted people’s perceptions of managing cash versus spending.

The flip side of BNPL is to help consumers with savings by using goals and automation to set aside cash and develop valuable tools for future money management, not only spreading the effects of past purchases. Many consumer fintechs are working on behavioral finance for easier and smarter approaches to savings and investments. This will be a trend that banks can look at to help balance the potentially negative aura of overspending and debt that can be associated with BNPL.

The opportunity for traditional lenders

Of course, despite Klarna being a trendsetter in the BNPL space, we’ve seen the company struggle in recent times. Klarna cites the coming recession as the cause of their cutbacks, but larger BNPL providers would have the resources to better weather this storm.

This leaves an opening for traditional lenders to confidently enter the BNPL space with resources that disruptive fintech startups like Klarna lack. All it would take is the right toolset.

To find out more about the FintechOS BNPL solution, visit our solution page.

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