where will ry go…

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The ability to pay for a product after buying it attracts more and more buyers. According to estimates, the volume of BNPL services (buy now, pay later) will grow actively in the coming years. Bloomchain has figured out the reasons for the popularity of payment solutions, and what problems this market might face.

BNPL allows buyers to pay for goods and services in installments According to data from Grand View Research, in the period 2021 to 2028, the market average annual growth rate for this service will be 22.4% and will reach $20.4 billion.

This payment method is most popular in the United States and European countries. According to the same study, the US BNPL’s market share is almost a quarter of the global market share. And according to Kaleido, by 2025, 30% of total e-commerce spending in Europe will be made with those “deferred” payments.

BNPL market size in the US in 2021-2028, $ billion Data from Grand View Research

When using BNPL, the purchase is actually paid for by the supply company that provides the buyer with such a payment system. At the time of the transaction, the seller receives from the provider the full amount of the price of the goods, and the buyer receives an interest-free period during which he must pay for the goods in whole or in part. If this doesn’t work, then he starts paying additional interest on late payments.

Among the largest and most promising companies in the BNPL market, the most frequently mentioned are Swedish Klarna, Australian Afterpay, and American Affirm. Moreover, on every continent there were people who could be considered the regional leaders of the segment.

The world’s largest company operating in the BNPL market. CB Insight Data

In Russia, this area is just starting to develop – only a few BNPL providers operate in the domestic market. This includes the “Register.rf” and “Always. Yes” services. In April 2021, they joined the Shares project launched by Tinkoff Bank.

The advantages of BNPL: savings and sales growth

BNPL has advantages for both buyers and sellers. For the former, this is an opportunity to immediately take things home and pay for them later, as well as the absence of the need to pay extra interest if payments are made on time for purchases. According to Mark Beresford, director of consulting firm Edgar, Dunn & Company, BNPL is a great option not only for those looking to extend their payments by a few months, but also for impulsive shoppers, as well as for consumers with low incomes or without a credit card.

According to an RFi Group study, the desire to save money is considered their main motivation by nearly half of buyers who use BNPL.

The reason why buyers start using BNPL services. RFi Group Data

The second place on the list was taken by the opportunity to test the purchased item – this was reported by 38% of respondents surveyed by RFi Group. “A representative from one of the leading clothing retailers once told me that up to 60% of her regulars buy some of the same clothes in different sizes,” says Beresford.

The importance of this option for BNPL customers is emphasized by data from Grand View Research, which states that by the end of 2020, more than half of the goods purchased using BNPL were fashion and electronic products, namely market segments with a large market share. most items are refundable.” It is for this reason that many services began to independently process the return of goods to retail chains – previously, in most cases, this had to be done by the buyer himself.

The share of different product segments in the total volume of purchases made using BNPL services in 2020. Data from Grand View Research

The seller’s main advantage is that with a payment scheme such as BNPL, the number of buyers who are hesitant to buy is reduced, the number who finally refuses. According to Beresford, buyers who use BNPL’s services are more likely to buy impulsively and the average transaction fee also increases.

“For sellers, this means an increase in total sales, as well as generating new revenue streams that come from loan interest and late fees charged by BNPL providers,” concluded Beresford.

Regulatory issues

More and more major players are showing interest in BNPL. Among the latest news on the topic are the Amazon and Affirm partnership project, the acquisition by Square of one of the market leaders Afterpay, the emergence of the installment payment function in Apple Pay, as well as an increase in Klarna’s valuation to $ 40 billion.

The interest from this big business allows us to make the assumption that the popularity of BNPL will only grow in the near future. This cannot fail to attract additional attention from regulators. In February 2021, the UK Financial Conduct Authority (FCA) announced it would monitor the activities of BNPL providers. The regulator said in a statement that the agency would receive new powers to “reduce potential risks to consumers.”

The agency believes that BNPL’s services are engaged in providing unsecured loans, and the transactions are not regulated by anyone. For this reason, it is necessary to introduce these services into the regulatory field and apply the same requirements to them, in accordance with the activities of other regulated credit institutions. This should reduce the risk to consumers, according to the FCA.

There are indeed risks for them, but they are mainly related to the fact that the buyers themselves may not fully understand the rules used by BNPL services. “Problems may arise if there is a delay in payment. Some providers reserve the right to report defaults to credit bureaus. This can affect a consumer’s credit rating and make it harder for them to get a loan or mortgage in the future,” notes Beresford.

According to a study by Credit Karma, already about 40% of Americans who use BNPL services are late for more than one payment, while 72% of them have experienced a credit rating downgrade.

This contradicts the concept of BNPL as a different product from classical credit. In addition, most providers position their transactions as financial guarantees that cannot damage their customers’ credit history.

BNPL providers may also experience problems. The fact is that they set their own credit limits for their customers and often have no information about how many products they have purchased in installments using other services. So, if at some point consumers stop paying on time, providers could lose control of their loans and face a liquidity shortage, Beresford added.

Innovation is the future

Already in 2022, regulators will begin to tighten the rules under which providers operate, but even under such conditions, the growth of this market could continue, Beresford said. According to him, many things will depend on the service of BNPL itself, which must simultaneously adapt both to the new requirements of the regulator and to the interests of buyers.

Analysts from the American company Mercator Advisory Group have identified eight areas that will be key to the development of BNPL services in the near future. According to experts, this will include:

  • the ability to use alternative customer data – in addition to traditional credit checks, BNPL services must use information from other companies, for example, banks and telecommunications. This data may be publicly available, or obtained using an API;

  • increased speed of service – according to the latest data, if a financial institution cannot open a new account or approve a loan application in less than five minutes, then the probability of the client refusing this operation increases to 60%;

  • flexibility in user verification (KYC) processes – it is important for companies to be able to quickly adapt to the ever-changing regulatory requirements in this area;

  • comprehensive fight against fraudsters and integration of reliable anti-money laundering tools;

  • development of analytical services – innovation requires constant improvement of data analysis methods, both on the part of the consumer and on the part of the seller. The ability to track this data and use this information in real time is critical to BNPL’s services business results;

  • full customer support throughout their life cycle – BNPL providers should look for opportunities to maximize the reach of their services, combining their products into a single ecosystem;

  • the possibility of diversification of business models – the created ecosystem must operate on a single technology platform, all new products must be compatible with the old;

  • development of our own risk assessment model – its creation can take from a few weeks to several months, while the market is constantly experiencing a shortage of qualified specialists in this area. Therefore, BNPL providers must pay attention to developments related to the use of artificial intelligence and machine learning.

This is an innovation that will drive the future growth of the BNPL market, said Beresford. According to him, in the near future, the development of services with this service will not only be handled by specialized providers, but also by the sellers themselves, as well as fintech companies related to digital payments.

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