Embedded finance and BNPL aren’t just for sofas and phones. As the use of BNPL continues to expand, despite rising setbacks, could BNPL allow consumers to spread the cost of their holidays?
A holiday can often be the most expensive outlay for an individual or household in any given year. Unlike most expenses, a holiday, even package deals, has numerous elements. Rarely does a single payment completely cover every cost over a seven-day holiday or weekend getaway. Even after big-ticket items like flights and accommodation are accounted for, budgeting for sundry holiday expenses is tricky at times of heightened inflation and dynamic exchange rates.
This is perhaps one reason why travel is becoming an increasingly valuable category to embedded finance and buy now pay later (BNPL) providers. Companies such as Klarna, Uplift, and Affirm are expanding their partnerships to include airlines, hotels, travel booking websites, cruise lines, travel agencies, and other travel-related businesses.
In the US, there is talk of ‘revenge tourism’. Following two years of restricted travel due to COVID-19, and despite inflation pressures and recession fears, consumers are determined to take holidays and even stretch themselves more than they might, treating themselves to experiences denied to them through the lockdown. Given that spending on BNPL between January 2020 and July 2021 in the US soared by 230% (according to Accenture analysis), it’s no wonder pent-up demand for holidays presents a bonanza for providers.
Holidaymakers also increasingly require a more personalized experience where they can make – and pay for – choices at every step of their holiday. From flight seats, connections, hotel rooms, restaurant tables, and excursions. To offer this personalization is complex, and lenders need to be able to move money back and forward to suppliers instantly. That requires an automated, flexible, and easily reconcilable payments ecosystem.
While embedded payment systems can provide a personalized and efficient BNPL process, it is a challenge for lenders because there are potentially many moving parts. The risk of failure due to outdated payment processes in that ecosystem may be one reason why banks have been sitting out on the sidelines of embedded finance.
BNPL and embedded finance disruptors have been eating the banks’ lunch, threatening banks’ credit card franchises. However, an expectation that providers will come under pressure from assuming too much risk combined with regulators gearing up to put the BNPL sector under tighter scrutiny has delayed banks’ full-throated entry into the market. For example, the FCA in the UK recently warned firms not to use misleading advertising to promote BNPL, and they must now warn customers of the risk of taking on debt.
Banks may also have misconceptions about the customers who use BNPL and how they use it. A common, but negative, assumption is that BNPL is the preserve of a profligate and spendthrift millennial cohort. Innovative payment methods are indeed popular with young people, but they are certainly not exclusive to Millennials and Gen-Z.
To find out more, read our BNPL Wayfinder report.
Our report found that, of adult consumers in France, Germany, and Spain, half were likely to use BNPL, and 18% were very likely to use it.
The research shows that embedded finance has potential for all age demographics. Among Generation X, 60% said they sometimes or prefer to use BNPL when available, while just over 50% of Baby Boomers said they sometimes use or prefer BNPL.
It’s not just those who are hardest up who regularly opt for BNPL, either. The highest rates of preference for BNPL came from the respondents’ two highest household income brackets. 58% of high-income shoppers favored BNPL, often choosing it as their first payment method option.
The research shows that, when it comes to holidays, the demand is clearly there for travel items. 27% of respondents used BNPL for travel, flights, and hotels, 31% used it for hotels and BNBs, and 23% on restaurants and takeaway food.
However, the preference for BNPL among younger people – particularly the more financial savvy of that generation – creates prime opportunities for embedded finance lenders seeking to acquire a new and growing pool of customers.
A study conducted by the research firm Advertiser Perceptions on behalf of Amount in the US found that many consumers would prefer to use BNPL from their own bank if it were offered, over a BNPL option offered through a non-bank or financial technology company. The leading reason for this across all generations was trust and banks’ highly regulated and compliant nature.
The same study published in April 2022 also revealed that seven out of 10 BNPL users had credit-rating scores of ‘excellent’ or ‘good’ while six out of 10 were homeowners. 73% of respondents said they would be very likely or somewhat likely to use a BNPL offering from their preferred bank.
Meanwhile, expanding embedded finance into holiday purchases will provide new data on how consumers save and pay for one of their biggest annual expenditures. While many consumer goods purchases through BNPL may well be impulse buys not backed by any savings plan, a holiday is often funded differently.
For example, an individual who spends USD 1,200 on holidays a year is probably putting USD 100 a month aside for their annual getaway. When it comes to buying tickets and making reservations, only USD 600 may be available in cash. BNPL bridges the gap over the subsequent months at a little extra cost depending on the provider and making repayments on time.
Embedded finance can become a helpful budgeting tool, and consumers can plan how their payments fit into their overall budget, such as MyCredello in the US. Education and communication, therefore, have a role to play. By informing consumers about best practices using BNPL and tailoring those products to customers, lenders can build and maintain long-term, high-value customer relationships.
To find out more about how the FintechOS platform can help you launch new and innovative embedded finance products, see our BNPL solution page.
