By Alexa Guenoun on Friday 15 October 2021
Buy now, pay later's stellar growth shows the importance of customer experience in today's banking battleground, writes Alexa Guenoun Chief Operating Officer at Temenos.
Buy Now Pay Later (BNPL) is experiencing breath-taking levels of growth. In 2020, purchases were estimated at $24bn globally, but the figure will end this year at $100bn – a significant rise of 400 per cent.
This explosive trend is only set to increase and by 2026, McKinsey predicts spending is expected to hit the $1trn mark.
Such an increase is down to the opportunities open banking platforms have provided these innovative financial services and, as a leading provider to established and challenger banks across the world, there are some crucial opportunities for banks from this explosive trend.
The power of customer experience
The incredible growth of buy now, pay later shows the importance of customer experience in banking today.
Today’s consumers – particularly younger cohorts – are increasingly demanding seamless and straightforward experiences. This is now the differentiator in banking: 81 per cent of banking leaders thought so in Temenos’ recent global study with the Economist Intelligence Unit. For an industry that has traditionally been product-focused, that’s a massive shift.
Experience is the key driver of the buy now, pay later boom. It’s embedded directly into the point of sale, so there’s no need to shop around separately for credit. There’s no ‘hard’ credit check, meaning rapid decisions. It’s interest-free if you pay on-time. And it provides payment flexibility at a time when finances, particularly among younger people, continue to be squeezed by the impact of COVID-19.
Combine this with the rapid acceleration of digital as a result of the pandemic –including in banking and ecommerce – and a perfect storm has been created.
MasterCard says BNPL loans increase sales by 45 per cent on average and reduce “cart abandonment” by 35 per cent. BNPL provider Affirm claims its merchant clients report an 85 per cent increase in average order value when consumers use its BNPL plan over other payment methods.
Respond now or pay later
Big Tech and Fintechs are flocking to BNPL. Jack Dorsey’s Square added has BNPL by acquiring AfterPay for $29bn. Amazon has announced partnerships to provide BNPL with Affirm in the US, Zip in Australia and Capital Float in India. MasterCard will offer BNPL in Britain, the US and Australia. And Apple is expected to announce its entry into the market later this year.
McKinsey estimates that $10bn in banks’ annual revenue is being lost to fintechs’ BNPL gains. They must respond.
Different business model approaches are possible. Some will choose to embed others’ solutions to offer BNPL. Barclays, SoFi, Synchrony are choosing this approach with MasterCard in the US. Others, like Monzo and ICICl are choosing to enter the market themselves.
Whichever route they choose, banks must recognize that BNPL is part of the broader transformation of banking into an open, experience-driven environment.
For example, only through an API-driven architecture can banks integrate their BNPL offerings into others’ ecosystems seamlessly. They’re also crucial to create end-to-end experiences to compete with those offered by providers like Affirm. And all BNPL providers will need the agility and speed offered by cloud computing to rapidly create, test, deploy and scale their solutions.
PayPal launched its Buy Now Pay Later products in several geographies, - including the US and in the first nine months, it had over 20 million loan applications, with their CEO Dan Schulman calling it ‘the fastest launch to any product we have ever launched’. PayPal is now building on this momentum, recently expanding into the Japanese market with the $2.7bn acquisition of Paidy.
AI is key for the benefit of all
At face value, BNPL seems like a ‘win-win’ for all. Customers get access to quick and affordable credit, often with no interest payments. Merchants benefit from dramatic increases in sales and providers generate revenue from taking a margin from these.
However, concerns do exist. Customers can fall behind on payments, which could incur interest and late fees, damage their credit score, and lead to them falling into debt. Equally, providers could find BNPL increases the risk of defaults and bad debt. This is where the importance of AI and machine learning comes in.
AI can help providers assess applicants' affordability and risk quickly and effectively, analysing data to supplement soft credit checks. It can also power fraud detection, such as AML and KYC. And as more loans move through the cycle, AI will continue learning to make these processes even more effective.
Finally, AI-powered data analytics can help banks identify customers most likely to use BNPL solutions and offer financial education to ensure they are fully aware of the risk. It can also flag those at-risk of falling into debt and propose possible solutions to ease their debt burden.
Cash-in your advantage
This final point touches on key inherent advantage banks hold - high levels of trust with their customers. In addition to this, banks are highly regulated, compared to an as-yet unregulated BNPL landscape. Finally, banks hold a massive amount of data which – through AI and machine learning – can help them to make effective, balanced decisions on BNPL.
Banks can combine these advantages with an experience-focused approach that harnesses the power of open, cloud-based banking platforms. In that case, there are considerable opportunities in the Buy Now Pay Later market and far beyond.
The views and opinions expressed are not necessarily those of AltFi.