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How To Manage Buy Now, Pay Later (BNPL) Features

If the Buy Now, Pay Later (BNPL) feature isn’t standard yet, it won’t be too long before it is. When customers make large purchases — and even some smaller ones — they often look for this option. And it’s not just customers who are excited about the choice. Some of the largest retailers, like Amazon and Apple, have initiated partnerships with financial institutions so that they can offer BNPL at checkout.

BNPL is an entire industry, one that has had little time to mature before consolidations started popping up left and right. In 2021, Square purchased Afterpay for over $29 billion and shortly thereafter PayPal snatched up a Japanese-based startup, Paidy, for $2.7 billion. Paidy is just another scrappy little company that reached unicorn status in record time.

So, what’s all the fuss? Well, for those old enough to remember how popular retail layaway programs were for the budget-conscious back in the day, BNPL is having its moment, only better. Customers get to make purchases now for a fraction of the price, or even with no initial outlay at all. They’re able to enjoy the items they purchase today (or whenever they are shipped) and make interest-free payments on them. 

In July 2020, nearly 38% of people in the U.S. had used BNPL. During the pandemic, along with the boom in online shopping, the number soared. By March 2021, that figure had increased to 55.8%. That’s a 48% jump in roughly eight months. 

What Is BNPL?

BNPL is an agreement that allows customers to buy goods on credit and make payments, often in four interest-free installments, though this will depend upon the type of arrangement. The payback period can range from weeks to months. Subsequent payments are automatically deducted. This option was originally offered at online checkouts, although the trend is beginning to catch on in physical stores, too. BNPL is offered through a variety of payment providers such as Affirm and Afterpay

The option is positioned as an additional tool to help customers manage their finances, take advantage of sales offerings or make important purchases. BNPL shifts the financial charges from the consumer to the retailer. But, as mentioned, the benefits are enormous for eCommerce businesses that are willing to bear the cost. 

The Demand

According to a recent study by PSCU, when bank and credit union users know that a BNPL option is available, 61% will use it. In 2021, PSCU began testing its own BNPL offering, enabling credit unions to provide installment payments tailored to their own products. The technology gives users more flexibility in their finances, allowing them to conserve cash by spreading out payments, all while continuing to purchase the things they need now that don’t quite fit into the current budget. This is particularly appealing to Gen Z and millennials, offering them alternatives to credit card debt.

The benefits are clear for retailers as well: RBC Capital Markets estimates that BNPL options at checkout result in 20% to 30% higher conversions and a 30% to 50% increase in average checkout values. Moreover, premium retailers can attract new customers who may have thought they couldn’t afford the brand. 

BNPL Is a Smart Strategy

For banks and credit unions, your users will increasingly demand BNPL capability. If you don’t have it yet, they will find it elsewhere. According to McKinsey, BNPL options are diverting $8 to $10 billion annually from bank revenues. Moreover, given that these receivables turn over roughly nine times a year, they are reaping a 30% to 35% ROA with similar loss rates — 6% to 8% — as for credit cards.

Banks and credit unions are participating in BNPL to retain their fair share of consumer spending that is being diverted from credit cards. It’s not a matter of cannibalization; rather, it’s a smart strategy to remain competitive.

Banks and credit unions have both a disadvantage and an advantage when it comes to BNPL. The disadvantage is that the customer experience is slightly different. Unlike pure-play BNPL companies, the option doesn’t appear at checkout where the buying decision is made. Rather, it’s something that customers must manage after the fact by going to their financial institution’s mobile application. 

But the advantages outweigh this inconvenience. According to PYMNTS research, nearly half of customers who use BNPL prefer to get this service from their bank or credit card issuer. This makes sense since all of the customer’s transactions are in one easy location. Plus, the security measures, history of payments and credit profile are already there. As banks and credit unions increasingly provide this option, they are well-positioned to overcome the first-mover advantage held by pure plays and fintech.

A Few Challenges to Consider 

It’s time for banks and credit unions to seriously consider how to compete in the BNPL market. There are some challenges to consider, however. Here are the top things to think about.

Profits Without Interest 

Much of the money that banks and credit unions make on lending out money comes from interest rate payments. Since BNPL loans are interest-free, banks and credit unions must make money by some other means. Of course, BNPL loans make money through merchant discount rates, interchange fees and transaction and late fees. However, Financial Brand estimates that financial institutions make less than half and money from BNPL loans as they do from traditional installment loans.

For this reason, BNPL pure plays are looking for more traditional financial product offerings to boost their overall profitability. While traditional banks and credit unions already have these other products and services in place, they must be aware that, while BNPL may stem the attrition from their credit card products, they must find a way to boost profitability.

Cost for Merchants 

Merchants must pay interchange fees up to 8%, in addition to administrative costs and any flat fees that exist. As the competition intensifies, fintechs have the operational excellence to continue to drive prices down. Banks and credits unions must be able to offer users additional value so as not to compete in a race to the bottom. 

Customer Experience

Financial institutions will need to ensure that the BNPL experience is as frictionless as possible. Since pure plays can offer the service at checkout, banks and credit unions will need to rely on other strategies. This might be a technical solution such as an SMS on the customer’s smartphone or a loyalty program that keeps your payment card top of wallet and positions your bank or credit union as the primary financial institution. 

Protecting Users

It’s easier for users to accumulate debt across a number of providers, either intentionally or inadvertently. This may be because they don’t think of BNPL as credit. They may have a significant number of payments due in the short term and overspend their budget. Also, the payments for BNPL can be significantly higher than credit cards. Banks and credit unions can give customers the tools they need to manage their finances in one place, prevent overspending and reduce anxiety for the most vulnerable credit users. 

Be aware that regulators are always watching. Transparency and visibility into transactions and penalties will be essential to avoiding regulatory snafus.

How Banks and Credit Unions Can Better Manage BNPL

Perhaps the biggest obstacle for banks and credit unions, when faced with new trends like BNPL, is that many institutions struggle to overcome the obstacles presented by unwieldy legacy systems on the back end. Despite the challenges, there are more opportunities in BNPL. Fintechs may have taken the lead, but banks and credit unions can have the advantage. It’s a matter of leveraging existing strengths and investing in the technology that can help support further market expansion and innovative new ideas.

That’s where the right partners can help. If you want to keep pace with the technological demands presented by the digital era, you’re going to need a cloud-native platform that will allow you to meet the needs of your most demanding customers.

For a personalized demonstration, contact Lumin Digital today.


Sofi – Buy Now, Pay Later Market Consolidation Heats Up

The Ascent – Study: Buy Now, Pay Later Services Continue Explosive Growth

CU Insight – What credit unions should know about BNPL

CNBC – Retailers bid farewell to layaway, as shoppers embrace buy now, pay later options

Pymnts – Lending Platforms, Virtual Cards Give Banks New Tools to Compete with BNPL Pure Plays

McKinsey – Buy now, pay later: Five business models to compete

The Financial Brand – The Dark Side of Buy Now, Pay Later: Risks Facing the Banking Industry