Buy Now, Pay Later: What's the big deal?

Tribe has delved deep into the world of embedded finance over the past few weeks – exploring everything from basics to pondering futuristic use cases. In this last blog of the embedded finance series, we examine one of the most prevalent trends of the moment: Buy Now, Pay Later (BNPL).

The global BNPL market size is predicted to reach a value of $4 trillion by 2030. So, what’s all the fuss about?

Is BNPL a credit card in disguise?

Consumers have long been able to split payments for larger purchases or ongoing shopping, with credit arrangements in-store, via mail order or credit cards.

BNPL is where alternative payments meets embedded lending, with a fully digitised and mobile optimised experience for the ultimate convenience. Using it is often seamless, as it appears on the merchant’s checkout page, alongside existing options such as credit cards, digital wallets or PayPal. There may be an initial registration process to complete, but the repayment terms are otherwise quickly made clear to the consumer. Most providers offer interest-free repayments if paid off on time. 

For merchants, embedding BNPL options at the checkout is fast becoming an absolute necessity, to make sure they are supporting their customers’ preferred payment methods across generations. Those that offer Buy Now, Pay Later as a payment option can also expect to see increased sales conversion and amount spent, along with repeat custom. 

Is this a sign of the death of credit cards? Anything is possible, but the likely answer is ‘no’. Consumers who responsibly use credit cards generally won’t feel the need to switch to BNPL, and credit cards often come with added perks from providers, whether it be cashback, points or air miles – to name a few – as well as protection. 

Credit lines for the younger generations – and beyond

For millennials and Gen Z, who either may not always be approved for credit cards or don’t like the option of traditional credit, BNPL offers them a way to purchase products in the same interest-free way, as long as they pay off the debt in full in the specified time; the consumer is unlikely to be subject to a hard credit check, and it shouldn’t affect a credit score. 

In the American market, millennials accounted for 40% of all BNPL users in 2020, but this is expected to swing towards Gen Z being the dominant cohort by the end of this year. However, BNPL is not just for the youngsters: A 2021 survey by Which? showed that Gen X accounted for 1 in 4 BNPL users in the UK.

Regulating The Wild West

One of the major red flags of an otherwise booming practice is regulation, or the lack of it. As the FCA pointed out earlier this year, not all BNPL products are regulated by the FCA under consumer credit regulation.

There are also growing concerns that the cost of living crisis may lead to reckless behaviour from both providers and consumers, with consumer watchdogs and support groups flagging the practice of offering BNPL for paying energy bills and other everyday expenses, such as food.

Such is the lack of regulation, BNPL providers themselves are beginning to take it upon themselves. One of the biggest players in this space, Klarna, announced earlier this month that shoppers using their services will have their repayment data shared with two of the UK’s biggest credit reference agencies from June. The move will be positive for responsible customers, who will be able to build a positive credit history; but conversely it will be a blot on the copybook of users who miss payments, and affect them when it comes to seeking credit in the future. 

What next for BNPL providers?

With BNPL providers becoming more mainstream, the biggest among them are turning their attention to the next stage of their evolution. As much as $8-10bn in annual revenues have already been diverted away from banks by BNPL providers. Klarna is perhaps the best example of how BNPL providers can expand beyond simply offering credit and maximise their brand loyalty. 

Klarna has partnered with brands all over the world, building a marketplace for consumers to shop and receive special offers directly via the Klarna app. In doing so, they’ve become far more than just a payment method or credit line - they’ve cemented (or embedded!) their existence in consumers' lives.

We fully expect more BNPL providers to look for their own ways to create embedded experiences and incentives beyond the pure act of the payment, those that succeed will create a more sustainable business model that transcends the BNPL, for however long it lasts.