Buy now, pay later (also known as BNPL) as a consumer finance option – and, more importantly, a merchant marketing tool – is a relatively recent arrival on the scene, but also a rebrand brand of a not so new idea.
Review Buy now, pay later as PayPal takes big step forward
PaymentsLog Review Buy now, pay later as PayPal takes big step forward
from PayPal June 15 announcement of its Pay Monthly product, allowing customers to make a purchase and pause payments over a period of six to 24 months, proved a good entry point for a discussion on the PaymentsJournal podcast between three veterans of the consumer lending space and its associated technologies:
- Brian Rileythe director of credit counseling at Mercator.
- Apour ShahSenior Director of Merchant Growth at PayPal.
- Randy BroadbentNational Account Manager/Solutions Consultant at Zoot Solutions, an enabling technology behind PayPal’s offering.
PayPal’s initiative comes at a time when BNPL offers are evolving. Originally driven by younger consumers attracted to non-credit score decisions, BNPL has made strides to be governed by more traditional aspects of consumer credit.
Riley, Shah and Broadbent discussed a range of topics, including what PayPal saw in the BNPL space that prompted this new offering, the challenges of decision-making and credit risk underwriting for BNPL services, how players in the space are shaking, and the merchant perspective and how they are driving BNPL.
After all, Riley pointed out, this is a merchant-centric payment proposition, which is the twist BNPL is putting on older, similar funding models that were consumer-centric.
“It really shifts the focus of the transaction,” Riley said. And that, he said, is good news and bad news. With BNPL, merchants were able to attract whole new segments of customers. On the other hand, with decisions not always meeting normal consumer lending standards, there has been “soaring risk”.
The current view of Buy Now, Pay Later (BNPL)
Shah noted that the basics of BNPL are not new to PayPal, pointing to its 2008 acquisition of Bill Me Later, which he continued to rename as PayPal credit. However, he made a distinction between how the BNPL was used before the pandemic and how it is evolving now. Before, he said, it was mainly focused on young people and their interests: “Fashion, electronics, home, a bit of travel.”
“What we see now,” he said, “partly because of the pandemic and in part because larger new entrants are coming into the space, it’s adoption across all consumer segments and adoption across all verticals.
At its core, Shah said, the BNPL is “fundamentally a loan product. You need to know how to run this business… if you want to be able to scale in space.
Shah sees growth ahead for BNPL, even amid the current economic uncertainty. PayPal’s new offering changes the dimensions, allowing for larger purchases spread over longer repayment periods. “It’s not about whether Buy Now, Pay Later is here to stay or grow,” he said. “It’s just how it grows, whether it grows responsibly and how it pivots to meet the demands of the cycle we’re going through.”
Decision and risk
Broadbent traced the modern iteration of BNPL to millennials and younger consumers who embraced it, lured by the no-credit-check entry into the purchase agreement — or, as Broadbent put it, “if you can fog up a mirror, let’s go, financing.
In Europe, however, where this version of BNPL debuted, regulators and credit bureaus began to push back, positioning the vehicle in more traditional retail credit underwriting. In the United States, the arch is following suit.
The challenge for BNPL suppliers, Broadbent said, is to apply the more traditional credit advance rules while creating a seamless experience for consumers and merchants who want to sell products to them. Features of these experiences include:
- Instant decision making
- A frictionless experience
- Ease of use (i.e. the payment solution is integrated at the point of sale)
“At the heart of it all is the idea that we need flexible rules,” said Broadbent, the kind that allow lenders to react when a consumer is underwater and when fraud is perpetrated.
Riley noted that more traditional lending rules will also help secure the value of consumer relationships. “Anyone through the turnstile” can artificially inflate the ranks but “the hope with a client relationship is that it lasts a while,” Riley said.
The state of play in the supplier space Buy now, pay later
While BNPL’s easy view might be that fintechs and other startups are the dominant players while more traditional companies have been slower to enter, Riley argued for a more nuanced view. PayPal, for example, is both a fintech and a mature company.
“From a trader’s perspective to their funding source, the trader needs someone who is going to be there tomorrow, and next year, and the year after that,” he said. .
Shah said it was PayPal’s view to expand its credit offerings with Pay Monthly and its flexibility with larger purchases and longer payment terms. He said the company is well positioned to thrive as a more traditional lending environment takes hold at BNPL.
“Working with regulators, working with credit bureaus is just part of what you need to do to run a good business and keep that growth responsible,” he said.
“From a merchant’s perspective, doing business with these more established vendors can make or break your own reputation in the long run. We think we have a good chance of being a top player in space.
The merchant’s point of view
Merchants want customers and sales. customers want payment flexibility. BNPL meets a need.
“Customers are always going to pay how they want, when they want,” Shah said. “That’s why people have so many different payment methods in their wallets.”
With BNPL, even under stricter credit decision standards, the checkpoint shifts, he said, providing an entry route for consumers who are eligible for credit but who are opposed fees or interest or long-term debts.
And then there is the marketing power of BNPL and its ability to attract new customers to marketplaces, whether online or in physical stores.
“You can’t ignore the power of this merchandising tool,” Shah said.