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By FintechOS · February 15, 2022
7 minute read

BNPL versus credit for retail lending: is it time for a showdown?

BNPL vs credit cards

Buy now, pay later financing (BNPL) is a hot topic for financial services institutions. Lockdown has driven a huge surge in online sales and BNPL is taking up market share as a digital alternative to traditional credit. Is it time for a showdown over which option will dominate retail lending? 

Online sales rose by more than 30% over the first year of lockdown, with some industries seeing jumps of up to 60% in digital sales. BNPL allowed retailers to embed instalment payment plan options directly into the digital sales journey on their site during a period of rising online sales, but is this the only driver for the surges in the BNPL market? 

In March 2021, The Ascent found more than 55% of consumers said they’d used BNPL, up from less than 38% in July 2020. 41% of respondents said they’d done so to save money in case of unforeseen circumstances, while 25% said it was because they’d already lost income. 

This has likely been driven by a need to reduce costs during a temporary period of furlough or career setback due to the COVID-19 lockdown. Consumers tightened their belts temporarily, with an expectation that their income would return later on, when payments would be more affordable. 

Yet, as we move away from the COVID-19 crisis, the playing field will level between BNPL and traditional credit options, as retail will no longer be focused on online-only. Will we then discover that BNPL has just been a necessity driven by lockdown, or is it the future of consumer finance? 

Let’s look closer at what BNPL is, what opportunities it offers, and finally look at how it matches up in a showdown with traditional credit. 

BNPL: a new contender or a flash in the pan? 

BNPL may be a new buzzword, but it’s not a new concept. It’s estimated that, nearly a hundred years ago, in 1925, one out of every seven dollars spent in the USA was as part of an instalment payment plan 

The popularity of paying for items in instalments was actually a primary reason for the Great Depression, as consumers taking advantage of this new purchase option fell behind on payments and got themselves into debt. 

That’s the source of the very reasonable fear that BNPL will cause another credit crisis as it enables consumers to spend beyond their means. Over 30% of BNPL customers have made a late payment, so this doesn’t seem irrational. 

Can Gen-Z be trusted with BNPL? 

Yet, reports have shown a 50% increase in the number of US consumers who claim to understand the consequences of BNPL. A survey of 13 to 17-year-olds, meanwhile, showed 70% knew what a credit score was. 

This isn’t surprising, given that 97% of young people believe financial literacy is important. Indeed, 35% have attended a financial education seminar. With the younger generation becoming more financially savvy than their elders, is BNPL now a safer option than it once was? 

A new generation, with careful planning, could respond to inflation by using affordable BNPL options, supported by digital tools that enable 24-hour management of payments. Yet, when the COVID-19 crisis is over and the option to buy in-person is restored fully, will BNPL drive this bright, new future, or will we return to traditional credit options? 

Let’s take a close look at the distinctions between BNPL and traditional credit, so we can see the advantages that BNPL may offer consumers beyond lockdown: 

bnpl vs credit cards infographicThe remaining pros and cons of BNPL 

As you can see, there are numerous benefits to BNPL that will continue to be attractive to customers beyond the end of the COVID-19 crisis. Indeed, there only seem to be two outstanding points in favour of credit cards: 

1 Rewards and special offers 

Firstly, credit cards often reward customers with benefits like travel insurance or frequent-flier miles. BNPL, however, could easily take on those options if consumers are interested in them.  

2 Flexibility 

BNPL is a set plan that covers a specific purchase, whereas credit cards can provide a flexible amount of credit that can be used in various places, paid off in part, then spent once again.  

It’s an often-quoted truism that younger generations are finding it increasingly difficult to accrue any amount of savings. Even those with a high income are living from paycheck to paycheck or living from interest-free overdrafts.  

The credit card generation 

Much blame has been levelled at younger people for their lack of planning. However, research shows 68% of Gen-Z budget and save more responsibly than their elders, while according to Finextra, more than a third of young people in the UK have over GBP 1,000 in savings 

In truth, the increasing cost of living is making it more difficult for younger people to build up any level of savings on top of their outgoings. In this circumstance, many are using credit cards or interest-free overdrafts in place of savings; a way to pay for expenses they can’t afford and then pay the money back later. 

Not to mention, utilizing credit rather than savings is the only way many young people can generate a credit rating to support essential credit purchases, such as a mortgage, in later life. Yet, there’s always the risk of this credit getting out of control. 

BNPL as a safe alternative to savings 

While BNPL may not be able to fill in for savings as credit cards do, payment plans do allow for emergency costs, such as the replacement of a necessary item like a refrigerator or mobile phone. In this case, BNPL lays out a set plan for repayment without the temptation to accrue high interest and additional expenditure, sending credit spiralling out of control. 

The very lack of flexibility that may seem like a disadvantage to BNPL over credit, could make it a safer option for avoiding credit card debt to low-income consumers at risk of financial disaster. 

As such, BNPL is both an easy option for modern consumers, and also an ethical choice. Not to mention, the lack of a physical card or account number to steal removes several possible options for fraudsters. 

BNPL taking USD 10 billion from credit providers 

It’s no wonder that BNPL is taking share of wallet from credit cards wherever they’re prevalent. In fact, McKinsey believes BNPL fintechs are “…diverting USD 8 billion to USD 10 billion in annual revenues away from banks”. 

This isn’t the end of the story for BNPL players, however. Various BNPL fintechs, from Klarna to Affirm, are now offering credit cards to those users who trust their digital specialty, but still need the flexibility of traditional credit. 

Not just content with taking a share of the pie from credit card providers, BNPL players are now coming for the rest of it. In this environment, it’s essential for traditional credit providers to offer the same kind of digital options. 

As our own CEO, Teo Blidarus recently wrote for IBS Intelligence: 

Despite the rush from many providers to ride the BNPL wave, banks are slow to join the party. Many still only offer their customers credit cards, leaving money on the table. If banks don’t cater for BNPL, their competitors – big tech, fintech, and payment firms – will race ahead.

So, how can traditional credit providers and banks enter the BNPL space? 

FintechOS platform for BNPL 

Our FintechOS platform can be integrated with your existing legacy systems to empower you to provide BNPL products without the need for a full digital transformation.  

The FintechOS platform’s low-code interface allows you to easily create BNPL offerings and seamlessly integrate them into third-party customer journeys. Access all the added value you need to compete faster than you thought possible. 

We were proud to empower Romania’s number 1 online retailer eMAG with BNPL options at checkout using the FintechOS platform, and we’re now excited to offer this option to other clients. 

To find out more about how quickly and easily you can launch BNPL products with the FintechOS platform, visit our BNPL solution page. 

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