BNPL: Primed for Growth

Buy-Now-Pay-Later (BNPL) has caused quite a buzz. In this blog, we take a look at the trajectory of BNPL services thus far, project where it is headed and discuss considerations for lenders when it comes to collections.

(Editor’s Note: This article was featured in the April issue of insideARM Strategy & Tech Insights)

BNPL Services are Growing

Despite BNPL info flooding the newswires, it holds only a small percentage of the payments landscape. BNPL services represent only 9% of global e-commerce transactions in 2021 (Juniper Research).  Yet, it is growing fast both in the US and globally.

By 2026, BNPL services will account for over 24% of global e-commerce transactions (Juniper Research) for physical goods by value.

Why the rapid growth estimates? BNPL is becoming “hot” for all generations:

• Older generations show growth because BNPL services target both Gen X and baby boomers (eMarketer).
• Gen Z and millennials make up more than 75% of BNPL users in the US (eMarketer).
• According to a February 2022 Afterpay report, Gen Z BNPL use is up by 900% since January 2020.

There’s a belief in the payments industry that the surge in BNPL adoption was due to increased online shopping during the pandemic. But the numbers have grown even as people resumed in-person shopping.

Based on current growth, Kaleido Intelligence estimates that there will be $680 billion of global BNPL transactions in 2025.  And Juniper Research suggests transactions up to $995 billion by 2026. This progression is extreme, so it isn’t a surprise that BNPL usage is outpacing growth of other payment types—even credit card payments.

The in-Store Modern Layaway Plans

So, what is BNPL?  It is point-of-sale financing where a consumer is offered a personal loan for the item being purchased and a short term to repay the loan (typically 4-6 payments). BNPL isn’t new or unique, but more like a modern take on the in-store layaways of the past where the consumer gets to take the product home before the loan is paid.

Ultimately, BNPL is a utility that can be quite valuable when used correctly to help retailers increase sales.

Merchants seem to love the offerings and have been quick to either create a direct relationship with one BNPL partner (like Target and Affirm) or offer multiple BNPL partners so a consumer can choose the best fit. In the BNPL marketplace, there are new players added every day with no clear frontrunner at this time.

Broadening Horizons with Non-Traditional Offerings

BNPL is growing beyond the online market and broadening the products offered in the past. BNPL companies, Affirm and Klarna, have both partnered with terminal maker Verifone for in-person transactions. These partnerships allow merchants to offer BNPL options at the time of sale.

Beyond retail products, providers are springing up to offer BNPL in places not traditionally associated with a layaway style loan. Interestingly, a British BNPL startup called Bumpers helps people pay for car repairs within the BNPL model.  Plus, the rental market provides multiple offerings for both housing and autos. A US BNPL provider, Flex, allows renters to split their rent payments.

BNPL can help reduce anxiety for certain unexpected, yet essential, expenditures. For example, people with expensive dental work and veterinarian bills can use BNPL services to spread out payments and soften an immediate financial blow without incurring incremental credit card charges.

CFPB Already Showing Interest in BNPL Services

While growth is fascinating, the question in the US is: which regulatory body will take the lead on the BNPL market?  The CFPB showed a clear interest when they opened an inquiry late in 2021 into five of the largest service providers: Affirm, Afterpay, Klarna, PayPal and Zip. The CFPB asked each provider to give data to clarify the risks and benefits of the product to consumers.

Pymnts.com reviewed the complaints from the CFPB database and reported “that the main issues consumers complain about are ‘incorrect information in your report’ and ‘attempts to collect debt not owed.’”  Based on this data, the processing of the information is the issue, not how BNPL works.  We think that the CFPB will look at the following items as each relates to BNPL:

• Considering the ability for consumers to pay before making the loan
• Ensuring customers receive correct disclosures
• Identifying whether consumers received protections similar to what credit card companies provide
• Confirming that correct rules for late fees and other policies are in place
• Ensuring that the consumer isn’t charged by both their bank and the BNPL provider due to inability to pay
• Understanding the type of data that’s being collected and how BNPL providers use the data

CRAs Join the BNPL Frenzy

Credit reporting agencies (CRAs) are working to get ahead of this market after it took off in such a rapid manner. For example, Equifax announced that they are accepting tradelines for BNPL. Equifax is creating a new industry code, thus ensuring that loans remain separate from traditional loan types. Trans Union and Experian are following suit with similar offerings. However, there isn’t enough information to build out full risk scorecards. Also, given how short-term the loans are, we wonder how data will be accurately reflected in reports.

Credit reporting agencies are touting that incorporating this information into reports can help a consumer with a subpar or thin credit file. Of course, this assumes the consumer pays on time.  Because 34% of BNPL users have been late on at least one payment, it’s unknown how this translates in the market (Credit Karma).

Third Party Debt Collection on Deck

Third party debt collectors should see an increase in volume, given the tremendous growth in consumer base and available markets.  Understanding who and what is being reported to the credit reporting agencies may give them an advantage.

If BNPL providers report to the credit reporting agencies, collectors can use the credit score impact as leverage to collect debt. Either way, collectors will have to be just as creative as the BNPL companies in product offerings.

Collectors should prepare to implement the same approaches as the BNPL providers by creating frictionless collecting. Also, we believe collectors should consider employing user experience expertise to build creative, technology-based solutions for paying debt.

These solutions could cover payment terms and consolidation strategies. More importantly, collectors should look at a solution that is an easy-to-use, accessible place to manage payments from any type of device the consumer uses. Making it easy to pay may be the differentiator for the collector.

Keep Watch on the Activities Swirling Around BNPL

So, what was old is new again with various flavors of BNPL and a host of new challenges. Given the accelerated growth of BNPL services, this payment type is here to stay.

We will be closely watching—and planning for—new rounds of regulations, changes in credit reporting, continued product evolution and challenges in collections.

[Editor’s note: this article was written by Melissa Peirano, former Associate Partner at Bridgeforce]