How can 'buy now, pay later' get better?

Better pricing strategies, more consumer education, and BNPL-specific promotions could improve the BNPL experience, the experts say.

Kevin McAllister

October 25, 2022

Good afternoon! In today's edition, we asked a group of experts to think about the BNPL experience and consider what they thought would benefit the space. Questions or comments? Send us a note at braintrust@protocol.com

Safwan Zaheer

Managing director at HundredX

Banks and fintech firms that provide BNPL will need to balance the following elements to build profitable BNPL businesses:

• Focus on profitable market segments. In market segments where the use of financing a purchase is high, average loan size is also high — ideally greater than $1,500 — and default rates are low (less than 10%). A retail ecommerce segment where average loan is less than $400 and competition is high is not the best segment for a BNPL provider, especially a new play, to enter.
• Improve pricing strategies (for pricing arbitrage). Create micro segments of customers and find ways to price each customer segment differently based on risk profiles. Finding pricing arbitrage opportunities using customer data is one way to build a profitable BNPL loan portfolio.
• Focus on providing higher approval rates. Improve underwriting by using alternative data, such as mobile phone usage, utility, rent payments, behavioral data, and bank account cash flow, along with attributes provided by credit bureau data. In some market segments, BNPL players will need to provide greater than 75% to 85% approval rates to be a successful and viable player, especially in the dental and elective health care segment.
• Offer a mix of installment lending products. Offering only a mono-line BNPL product (four or six biweekly, interest-free) is not a good strategy. BNPL players should offer a mix of installment lending products, such as same-as-cash, no-interest-no-down, other promotional products, leases, interest-bearing flexible short- and long-term loan offers, etc; each of these have different profitability performance. Offering a diversity of products to customers is one way for BNPL players to ensure business is profitable
• Offer other banking products (besides BNPL). Add other financial services products, such as credit cards, savings account, wealth and investment tools, and even crypto to the mix. Cross-sell these products to customers, ideally when the need has been identified and customers presented with a prequalified offer by leveraging data collected through BNPL usage behavior. BNPL providers will need to build a comprehensive road map of additional products to offer to customers if they are a BNPL-only provider.

Matthias Knecht

Co-founder & managing director at Billie

I believe the B2B BNPL payment experience in particular needs a major revamp. To activate the payment option "purchase on invoice" — by far the most popular payment method in many countries — business customers often have to go through a time-consuming process. In the first step, they have to apply for their desired credit limit manually by email or phone and provide proof of identity and creditworthiness to the merchant. The second step is to wait for the merchant's finance department to decide on the requested limit. This process can take anywhere from a few days to a week since everything is handled manually.

In 2022, we are talking about a payment experience for business customers that is stuck in the 1990s. Why? Because most retailers are working with in-house developed solutions that in many ways don't allow them to meet the modern shopping experience demands we've all adopted from our personal lives. This is what we at Billie want to change.

Sunil Singh

CEO at Tallied

Fundamentally we need to recognize that this is not a lending product. It's more commercially driven, used by merchants and providers to drive sales. With credit cards, a consumer’s rights and recourse are well laid out. There have been regulations for decades. Consumer harm is limited because there are good guardrails around it.

BNPL came up so quickly and drove so much volume, especially amid the frenzy during COVID-19. A lot of consumers don't even know what they're getting into, and so consumer harm potential is high. To make BNPL a sustainable long-term product category, consumer education and standardized disclosures will be key. Let them know that they are essentially stacking up debt and how it impacts their credit history if they’re not able to make payments, for example.

From the merchant side, there's a tremendous amount of data that is captured and nobody knows how BNPL providers are using it to market or to build their models. It's kind of a black box. So consumers and BNPL partners need greater transparency. Increasingly, merchants, some of whom are paying more than the interchange fee, are realizing they’d be better served if there were more of a relationship, and thus insights, with consumers to offer discounts and promotions. Ultimately, we may see BNPL get integrated into an existing product category, one being a credit card. So if you had a $5,000 bill and bought $1,000 worth of home improvement items at Home Depot, that $1,000 from your statement would convert into a BNPL installment payment over six months versus paying down your monthly bill.

Natasha Zurnamer

CEO at Optty

"Buy now, pay later" is well positioned to boom as consumers look for solutions to provide genuine relief during difficult economic times. BNPL companies should consider the following value propositions to better serve consumers. These include:

• Longer duration of payment plans, offering consumers choice to extend the payment intervals and even pay a small additional fee to be able to pay off in smaller increments over a longer period of time.
• Payment timing selection, allowing a customer to plan payments with income pay cycles to better manage their cash flow.
• Payment deferment to provide a small relief window on the timing of an upcoming payment in difficult times.
• Loyalty programs including cross-brand loyalty like petrol (gas) and travel discounts, frequent-flyer points, and more.

In these current times, BNPLs like Klarna and Afterpay offer consumers the ability to manage their plans with options to defer and notify on a return to extend the payment window to accommodate time for the items to be refunded. It is this relief that creates loyalty to the payment method. Opportunities for promotions exclusive to the BNPL payment method also offer merchants the opportunity to provide meaningful discounts to consumers, all supported by the BNPL provider. Promotions including "fourth payment free" are key drivers in difficult economic times and provide a 25% discount to consumers, which is highly appealing.

It is my belief that consumers will be open to paying small fees for longer payment windows, especially during peak season like Christmas, all driven by their desire to smooth their cash flow and buy the items of choice.

Sashank Rishyasringa

Co-founder and managing director at Axio

"Buy now, pay later" possess the incredible potential to empower customers to make aspirational purchases without impacting their finances. BNPL is fundamentally a consumer loan and should be presented with complete transparency as a credit product and not merely a payment product. This will help alleviate the confusion caused due to the mischaracterization of the product. Secondly, companies offering "pay later" should develop water-tight underwriting policies to lower risk and loss rates. Finally, as a multi-use credit offering, "pay later's" utility and value increase when the product is available across several brands and categories. Building a seamless sign-up experience and improving the ease of use would also increase the frequency of utilization by customers.

Dominique Tetnowski

Research analyst at Juniper Research

The most significant ways in which the BNPL market can develop largely revolve around the need for a more secure regulatory environment. Although the way in which the BNPL regulatory framework will look in the near future is fairly unclear, it is clear that any adjustments made will be in the best interest of consumers, and as a result, ensure the market develops securely. Regulators are focused on reducing the financial risk currently threatening consumer debt rates. Within each market, the forthcoming regulatory framework will depend on the existing maturity of legislative frameworks and the effectiveness of specific consumer protection regulations. All regulatory changes will not only further protect the consumer, but also strengthen the overall BNPL market, creating a sustainable framework in which BNPL providers can innovate and develop.

Outside of the regulatory landscape, vendors must utilize all monetization opportunities by tapping into markets outside of the typical ecommerce and retail. By providing payment offering in less-explored verticals, BNPL providers will be able to further diversify their portfolios as product offerings and innovation become increasingly limited within ecommerce. For example, the provision of BNPL services within the health care sector increases accessibility for those who may not have been able to afford the full cost upfront, which further benefits both the health care provider and the BNPL service provider. To ensure the payment solution is utilized to its full potential, it must not be limited to one vertical. This will also ensure BNPL can compete with credit more successfully.

Libor Michalek

President of technology and risk operations at Affirm

Every year, Americans pay $120 billion in credit card interest and fees. In fact, the average American, paying only the minimum, spends nearly $1,000 annually in interest on revolving credit card debt. BNPL is supposed to be different, yet too many BNPL players continue to rely on outdated anti-consumer practices like late and hidden fees to generate revenue.

In 11 years of existence, Affirm has never charged a single penny in late or hidden fees. Consumers never pay more than they agree to upfront when making a purchase with Affirm.

So how did we end up here, and how can others follow suit?

Affirm underwrites every transaction at the point of sale, and only extends credit to consumers we believe will pay us back. If a loan is underwritten properly, there’s no need to make up lost revenue with late fees that hurt consumers when they’re already struggling. Strong underwriting is especially important during difficult economic times. Without finely calibrated tools to assess a consumer’s creditworthiness, some lenders’ only option is to resort to reducing approval rates — limiting consumers’ options, harming merchant partners, and ultimately decreasing revenue for themselves.

Consumers shouldn’t have to pay late fees to compensate for providers’ poor underwriting, nor should they have to pay late fees to providers that don’t bother underwriting at all. It’s time for BNPL to do away with hidden fees, underwrite properly, and do what’s right for the consumer.

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