Is the future of Buy Now Pay Later bright compared to traditional credit?

The Fintech Forecast is a series of guest articles published each month from thought leaders at ACI Worldwide. 

Author: Elise Thrale

The convenience brought to Gen Z and millennials by Buy Now Pay Later (BNPL), as well as the boom of e-commerce has provided a huge incentive to adopt this new form of lending. But, is there an inherent risk of young shoppers falling into a debt trap as they increase their usage of different BNPL products? As its use expands from non-essential purchases to everyday purchases such as groceries and petrol, what does its future look like?

Consumer lending at the click of a button

With BNPL, shoppers can pay for purchases in stores or online with ease, staggering payments with zero interest. These costs are typically paid back in weekly, fortnightly, or monthly instalments, with interest only charged if consumers make a late payment. Consumers are not lumbered with applications for credit or a huge lump bill at the end of the month in order to borrow money.

The concept is seemingly win-win. Lenders make money by charging merchants between 1.5% and 7% commission for purchases made through BNPL. This is worth the cost for retailers, who see a boost in sales and the number of customers making purchases. And shoppers pay no interest and are able to make the purchases they want and need.

Surfing the Buy Now Pay Later tidal wave

BNPL has steadily been gaining popularity and has boomed during the pandemic, in which consumers took to shopping online in want of shopping in brick-and-mortar stores. In 2021 alone, investments in the Buy Now Pay Later industry were upwards of $4 billion. What’s more, in the UK, more than 17 million people, just under a third of the overall population, were regularly using BNPL at the end of 2021, through platforms offered by the likes of Klarna, ClearPay and Paypal, nearly doubling since early 2020. This growth is not likely to slow.

Despite the obvious benefits of borrowing without interest, the recent increased cost of living across the globe has caused some consumers to rely on BNPL to pay their bills. In the UK alone, almost one third of shoppers who use BNPL have reported that repayments have become ‘unmanageable’.

Making the most out of BNPL

Designed to keep consumers out of debt with zero interest and to ‘try before you by’, BNPL is already a better alternative than traditional credit, getting a loan to pay for or foregoing a bill payment. The problem is that many BNPL lenders do not perform credit checks on consumers, nor do they communicate with other if consumers are racking up debts across multiple platforms. This means that very young consumers can get accepted to BNPL and risk having multiple debts owed to several lenders. However, with the growth of BNPL, we should also be looking to enhance solutions to collect money from shoppers in more innovative ways, for example by implementing direct debit mandates, consumers will not fall into a debt trap and merchants and lenders are still able to make profit, without hindering consumers. Gamification of repaying loans by rewarding consumers with small rewards for each repayment, or other bonus solutions will encourage shoppers to repay in good time.

Looking to the future of lending

There is no doubt that BNPL will continue to attract young shoppers and older generations that don’t have a credit card. History has shown that consumers stick to their payment method of choice, and so the BNPL generation will eventually outweigh traditional credit users. The major players in the BNPL industry will soon be joined by the likes of Mastercard and Visa. BNPL will eventually become easy for everyone in the payments ecosystem to use, with providers such as Apple Pay announcing they will build a BNPL solution for iOS 16, with lending provided by Goldman Sachs. As it is adopted more, consumers will get used to the benefit of paying in small instalments over one big lump monthly sum such as that of traditional credit.

BNPL is a convenient solution for all parties, consumer, merchant and lender. It is here to stay and the early success it has had in the western world will surely become global, once it has more data points and improved AI and processes, it has the potential to become the credit card of the 21^st century.