The Latest Disruption in Finance: Buy Now, Pay LaterBy Lisset May Cervantes | Thu, 08/12/2021 - 09:04
A new wave of Buy Now, Pay Later (BNPL) services, which allow consumers to buy an item and pay later in interest-free installments, have lately been shaking up the traditional credit card business. In the US, this solution grew 215 percent year over year in the first two months of 2021, according to an Adobe analysis. The lenders partner with retailers like Macy’s, Walmart, and Peloton to offer their services.
BNPL is most popular among millennials and Generation Z, who prefer to have access to a variety of payment options and have proven to be quick adopters of new technologies. Both groups have clearly shown an aversion to credit and a willingness to adopt alternative payment methods, particularly BNPL. Younger generations look at BNPL as a budgeting tool, while on the flip side, they see credit cards as an easy way to accumulate debt.
Users are attracted to the feature of receiving their purchases right away while organizing repayment for weeks or months. In some cases, it serves as a supplement to credit cards; in many cases, BNPL serves as an alternative, which essentially provides free financing for the consumer.
Nearly half of consumers said they spend anywhere from 10 percent to over 40 percent more when they use the buy now, pay later plan versus when they use a credit card, according to a survey released by Cardify, a data firm that tracks consumer spending. And we know that Latin America and Mexico will follow this trend with some variants, so it should be carefully considered by merchants as a tool for growth.
Buy now, pay later is just getting started. In Mexico, this solution represents a huge opportunity if we consider the little access to traditional banking, low banking, high cash flow, and the limited diversity of payment methods but, adapting to this business landscape has represented a difficult challenge for foreign BNPL providers. For context, 60 percent of the population does not have access to banking services and approximately 82 percent do not own a credit card.
It is very important to reduce the credit access gap in this country and generate secure, contactless, easy-to-use and quality solutions to rural and underserved areas, improving financial inclusion and fostering confidence and the acquisition of skills to participate in electronic commerce.
Currently, 95 percent of global commerce takes place using traditional methods of payment, whereas the new online systems cover only the remaining 5 percent. However, thanks to digitalization creating new alternatives to conventional payment methods, this situation is steadily changing. Besides new ways to move money, also entirely new ways to make business and safe transactions are being born.
If we add to this the high level of fraud and chargebacks in the country, successful implementation of this payment method in the country would mean safer transactions, e-commerce growth, and access to new markets. In Mexico, Kueski Pay is a pioneer in this industry.
Kueski Pay has allowed hundreds of national and international companies to increase their online sales by up to 70 percent, eliminating chargebacks and increasing the average ticket by up to 50 percent. It also allows users to generate a credit history since we report when customers pay on time (or default on a payment), which is something that the large global BNPL leaders typically do not track.
COVID's impact on income was undoubtedly an accelerator of this trend and there is no turning back, even users, unlike any other banking product, enjoy sharing their experience buying online and partializing their purchases. The top items respondents bought using these services include electronics, clothing, beauty and fashion items, furniture and appliances, especially for larger-ticket items.
We are living exciting times for the BNPL industry. A few days ago, we saw the biggest takeover deal in Australian corporate history when Square announced that it is acquiring Australian BNPL giant Afterpay in a US$29 billion all-stock deal. There’s no doubt this is an indication of a rapidly growing industry.
As the former commercial chief at PayPal, Dana Stalder, wrote, “Every five to 10 years, the global payments industry undergoes a critical innovation cycle that determines the winners and losers for the next several decades. The last major transition was the shift to NFC-based mobile payments.” Today, it is the turn of the BNPL solutions because, let’s face it, millennials don’t like credit.
Finally, considering the differences in costs of living and salary cycles in different countries, BNPL services may serve different needs in different economies. While it may be just another payment method in advanced economies, the BNPL model will potentially be a game changer in developing countries and bring unbanked populations into the mainstream economy.