Jan 5, 2022
The COVID-19 pandemic has evidently left millions of people jobless and financially unstable, making them explore alternative financing options when purchasing their daily needs. Among these financing options is Buy Now, Pay Later, which has always been native to e-commerce.
According to a 2020 survey, consumers use BNPL solutions mainly because they want to avoid paying credit card interest. Others choose BNPL because they want to make purchases that don’t fit their current budget; borrow money without a credit check; avoid using a credit card; and use an alternative payment method because they can’t get approved for a credit card, their credit cards are maxed out, and they don’t own a bank account. Another survey revealed that BNPL is mostly used in certain discretionary categories such as apparel, laptops, and beauty products, among other things.
BNPL has rapidly risen over the past year, so much so that this financing arrangement accounted for 2.1% or $97 billion of all global e-commerce transactions in 2020 and is expected to double by 4.2% by 2024. It’s clear now that BNPL is here to stay, especially as e-commerce will continue to drive consumer behaviour and consumers will rely more on convenient shopping methods. Let’s look at BNPL trends that will likely manifest and drive the growth of the sector in 2022.
A user forecast from Insider Intelligence revealed that more than 40% of BNPL service users in the United States were millennials, with Gen Zs eating into this share over the next four years as more of them go into digital shopping and seek financial flexibility. Henceforth why BNPL companies will work on serving these younger consumers more in the upcoming year.
It’s only right that BNPL companies serve this niche market considering that young consumers are usually unable to apply for credit or loans because they haven’t had the chance to build their credit scores yet. These younger consumers are also choosing financing options that are best for their personal finance, avoiding accrued debt as much as possible. Gen Zs, in particular, are now taking a smarter approach to personal finance because they want to secure well-paying and stable jobs, grow their savings, and avoid massive amounts of debt.
BNPL services are expected to increase sales as e-commerce activities continue to grow during and after the pandemic, where new consumer behaviours such as online shopping and remote work become part of the new normal. Large companies such as Square, Amazon, and Apple have already onboarded this trend—Square bought Afterpay a $29 billion all-stock deal in July while Amazon and Apple each partnered with Affirm to bring BNPL services to their customers.
Amazon, in particular, can be powerful in this aspect as it’s expected to account for 41.4% of e-commerce sales in the US by the end of 2021, surpassing Walmart, eBay, Apple, and The Home Depot. As The Last Futurist Editor-in-Chief Michael Spencer pointed out, e-commerce brands can change how shoppers leverage debt to boost the economy faster and better.
Alternatively, BNPL services will also lead more consumers to e-commerce as this financing arrangement makes the customer journey more seamless than ever. Through BNPL, online brands can attract consumers who couldn’t afford to shop with them before and retain existing customers who don’t always have the resources to pay upfront.
According to McKinsey & Company, consumers have a very high affinity and engagement with BNPL services. In fact, seasoned BNPL consumers are found using the service about 15 to 20 times a year. BNPL then presents itself as a lucrative opportunity for e-commerce brands to attract millions of customers and stay ahead of offline businesses.
As consumers rely on digital solutions more with their daily transactions, banks are trying to stay afloat and still be more relevant to their existing customers by looking at BNPL services as they represent a fraction of the overall payments market and contribute to the circulation of economic activity.
Digital banking service provider Amount is already breaking ground in this trend with its partnership with TD Bank. Through Amount’s BNPL services, the lender allows consumers to select an instalment payment option when they purchase from merchant partner NordicTrack. Amount also enables its partner banks to launch their own white-label instalment financing solution in months, allowing them to better serve customers and ultimately foster the role of BNPL in the finance sector.
As BNPL becomes a more attractive payment option for millions of consumers, governments worldwide may start or continue looking at this type of financing service seriously. Evidently, there are still risks associated with BNPL services. For instance, the Australian Parliament found that BNPL funding is a factor in one out of five consumer insolvencies. Another study revealed that two-thirds of BNPL users have a credit card balance that's 75% of their limit or more when making their first BNPL purchase.
These risks may continue to happen in the next few years, which may push regulators to further look at BNPL services and their overall role in the finance sector.
As convenience becomes a staple in the digital world, BNPL will remain a powerful tool in the world of business and finance. BNPL services will also hold a bigger role in the lives of consumers who have little to no history with credit. This is where credolab comes into play.
Credolab helps BNPL players approve more customers, including those without a credit history. We use alternative data to convert digital footprints into a credit score in real-time, simultaneously improving the customer journey while assisting lenders with their credit risk management.