Changing the Checkout Experience with Buy Now, Pay Later (BNPL) in Fintech

Buy Now Pay Later (BNPL) has emerged as another driving force in the financial ecosystem in recent years amidst numerous FinTech advancements. What is driving the rise of BNPL in the current era, and what possible risks stand in the way of BNPL providers? We will discuss all these in this article.

The BNPL ecosystem: Key stakeholders, driving factors, and benefits

The fintech sphere is growing and offering various products and services, which include digital currencies (part of the Web 3.0 offerings) and alternative payment options such as Buy Now, Pay Later (BNPL). 

BNPL providers witnessed massive growth during the COVID-19 pandemic, driven primarily by the uncertain economic climate. This is because consumer preferences shifted towards digital and more convenient payment options that allowed them to break their payments or purchase on credit. Between January 2020 and June 2021, BNPL leaders Affirm, Klarna, and Afterpay have all more than doubled the gross merchandise value, according to SPG Global.

How do BNPL services work?

A BNPL transaction involves three parties: the consumer, the merchant, and the BNPL provider.

• The consumer uses a credit or debit card, pays either a small amount or nothing, and may split the payment over an installment period.
• The merchant acts as the bridge between BNPL providers and consumers, offering customers the flexibility to finance their purchases at the point of sale. To decrease card abandonment rates, they use BNPL as a flexible payment option. According to Accenture, merchants that use BNPL services are 30% more likely to close the sale than those that don’t.
• The BNPL or the financial services provider pays the merchant at the time of the transaction. They also assume responsibility for granting credit and collecting payments from the consumer. Normally, BNPL providers are tech companies that take the risk of non-repayment from the consumer, acting as both the lender and the payment processor.

Opportunities BNPL offers and the challenges it poses

BNPL’s aspects that transform the checkout experience

Streamlined efficiency improves customer experience

BNPL services disrupt the traditional checkout process by eliminating lengthy application forms and protracted credit approvals. Their seamless integration within applications enables swift financial decision-making during the checkout, enhances customer convenience, and expedites purchase completion.

Enhanced affordability for consumers on a budget

By facilitating access to larger purchases through manageable installments, BNPL services reduce the upfront financial burden. This in turn empowers customers to acquire their desired items while managing their budgets.

Boosted conversion rates 

The adoption of BNPL significantly impacts business metrics such as cart abandonment rates and basket sizes. The increased affordability offered by BNPL services helps mitigate cart abandonment rates and contributes to higher conversion rates and potentially greater average order values too.

Targeted customer appeal

BNPL aligns with evolving consumer preferences, particularly among younger demographics who value convenience and financial flexibility. This modern payment option resonates with these customer segments, potentially attracting new clientele and bolstering brand loyalty.

Expected challenges for BNPL providers

Consumers falling behind on their payments

Consumers failing to pay their installments on time leads to potential financial losses for providers and merchants, increasing operational and collection costs. 

Lack of trust in financial institutions

Some consumers have reservations about BNPL services, such as concerns about data security, payment transparency, and customer support.

Regulators to increase scrutiny

As BNPL gains popularity, regulatory scrutiny of BNPL providers is also increasing. Consistently managing compliance with these evolving regulations becomes a challenge, requiring RegTech solutions.

Impacts of recurring inflation

Recurring inflation can affect the purchasing power of consumers, potentially making it challenging for them to meet installment payments.

The future of BNPL in fintech’s realm

The future of the BNPL industry is promising provided some uncertainties are addressed beforehand. The providers continue to expand internationally and tap into emerging markets. However, consumers must be educated on the implications of BNPL services, making it easier for all parties to run transactions and collect payments smoothly. 

Organizations interested in developing a fintech app with BNPL services should understand the regulatory and financial challenges associated with the service to avoid consequences such as consumers not paying on time (leading to debt burden) or regulators penalizing the service.

If you’re looking for such solutions, VentureDive can help enable your business with embedded finance solutions to stay ahead in the market space. Connect with our experts today to discuss your project.