Buy Now, Pay Later (BNPL), in essence, means that a customer is making a purchase of an item and paying for it later or over a stipulated period of time. The model typically entails that the customer does not pay any additional costs for the purchase, unlike purchases made using a credit or a bank loan. This is not a new concept and many of us have already experienced it unknowingly. For example, your neighborhood store or milkman may have allowed you to purchase products throughout the month and kept a record of all your purchases. You typically pay the accumulated amount by the end of the month or during specific and agreed days of the months. The creditor may have agreed that you make the payment in easy interest-free instalments over a period of a few months. That is exactly what non-institutionalized Buy Now Pay Later means.
The practices of BNPL and paying in installments are not new. In the last few decades, personal credit transformed from loans to credit cards to the now trending shape of BNPL. However, BNPL got institutionalized rapidly in the past decade, triggering a massive shift in credit card usage while allowing consumers a number of interest free payment formats.
BNPL is providing e-commerce consumers an attractive alternative to credit card debt by giving them the option to purchase small ticket goods and pay the amount in interest free installments. The BNPL model usually works in two ways, one by charging the seller or merchant a fee for the transaction and the second is by point-of-sale loan which entails charging the consumers an administrative fee in case he is unable to pay back the loan in the interest free period.
What’s making the BNPL format massively popular amongst consumers across the world is the power to accommodate smaller ticket items without the bruising impact of interest rates or additional costs. Merchants aren’t complaining either because by strengthening the purchasing power of consumers, BNPL is boosting sales. According to Afterpay, BNPL increases new customers by 48%-80%, and reduces returns by 8%-18%.
However, there is one core challenge that the BNPL channel faces when it comes to underbanked and unbanked consumers. That is, the lack of traditional bank accounts, and/or cards. However, in emerging economies across Africa and Asia, mobile wallets have evolved to fill the gap traditional banking had failed to fill. Companies like TerraPay build and operate interoperable payment rails to facilitate payments from various instruments such as bank accounts, cards, and mobile wallets. Therefore, from a TerraPay perspective, BNPL is another use case that can be facilitated with the existing payment-centric services that TerraPay provides its users.
There has been a surge of players in the BNPL sector and they can be broadly be categorized as direct providers, who offer BNPL products at point-of-sale (for instance, Affirm, Afterpay Klarna); facilitators, who usually are major payment companies enabling merchant networks to offer direct BNPL solutions (such as, Mastercard, Stripe); and retroactive providers, who give financing options to consumers on all purchase on credit cards (example, Chase, Amex).
According to a 2019 research study, before the pandemic hit the world, the global BNPL platform market was estimated to be over USD 7.3 Billion growing at a CAGR of 21.2% till 2027. However, the pandemic propelled the sector at an even more astounding growth rate. With economies across the world experiencing a downturn, high unemployment rate and low financial liquidity, people are finding interest free BNPL models highly lucrative to sustain and survive.
Propelled by the pandemic impact, a Business Insider intelligence research suggests BNPL might end up raking up an estimated $680 billion in transaction volume by 2025. In India itself, post pandemic, the 2021 Global Payment Report by Worldpay from FIS reports BNPL to be the fastest growing e-commerce online payment method recording a 3% but an expected CAGR of 53%.
Even in geographies with comparatively lesser Fintech penetration, such as the Middle East and North Africa (MENA), BNPL service is being provided by a series of new start-ups who are looking forward to replicating the US, European and Australian success. The BNPL service providers include Aramex, Tabby, Shahry, Qesma, Postpay, Cashew, Tamara, Valu, Spotii, amongst others are gaining stronger foothold and is replacing the much widely popular cash-on-delivery (COD) payment model. Amongst the new start-ups, Tabby, Tamara, Postpay, and Spotii have cumulatively raised around $43 million for rolling out their operations in the region.
The region has to deal with trust deficit for online payment models and low financial inclusion means a widely popular cash-on-delivery (COD) payment model. However, the BNPL model is being actively embraced by the people, and specially the millenials and Gen Z as it helps them have the assurance of receiving products first and is deemed as a great enabler for those in the lower income bracket who find it convenient to break their purchases into flexible installments. The Worldpay’s 2020 Global Payments report projects that BNPL would account for 9% of the ecommerce payments by 2023 in the entire European, Middle East, and African region.
Furthermore, it is no myth that most of the inbound remittances people receive in developing or emerging markets are used for purchasing goods and services. BNPL can be another way to provide that short term financing facility linked to remittances data. TerraPay has evolved to be more than a remittances company as they continue to support interoperability with a project recently launched in Congo B, and working with a large bank in Africa for the acceptance of mobile wallets across e-commerce and point of sale.
While the BNPL model continuously strengthens its position in the global market, like every other payment model, BNPL too has a flipside.
In the pandemic hit world with shrinking economy, income, and employment size, the model can easily make people buy more than their purchasing power and lead them into the debt trap. The inability to pay a mounted installment in time will not only impact the credit history, but in most cases, also apply compounding interest rates from the time of purchase made and not from the time of default.
Unlike credit cards, there is less due diligence involved for who can avail BNPL services. Many times, lending companies fail to conduct adequate risk assessment of credit takers and also, since BNPL encourages customers to purchase products, some with lower income and lower purchasing power fail to pay back and get entangled in a credit loop. From the Fintech sector viewpoint, a national or global economic recession or crisis can suddenly impact the ability for a large population to pay back.
However, the good news is, because of the surge in mobile wallet uses across the world, lenders are developing risk score cards that can enable them to go into the lending business much more astutely. This is further catapulting the BPNL model. Similar to open banking trends, and direct debit functionality for bank accounts and cards, mobile wallets can also be debited to automatically collect the payment against the items purchased using BNPL. TerraPay is positioned quite well to facilitate this for merchants and financing institutions, as TerraPay has direct connections with over 500 million mobile wallets across the world.
In conclusion, BNPL is here to stay and consolidation in terms of BNPL providers is inevitable unless we see breakthrough business models that truly provide financial inclusion and target the large mobile money addressable market. We at TerraPay are continuosly evoolving as a payments company and for us security, speed, and costs of a transaction are key to ensure customers continue to benefit from the interoperable payments ecosystem.