Buy Now Pay Later: The New Financial Buzzword in Retail

The retail business has arrived at a tipping point. Intense economic conditions have brought changing consumer behavior and standard practices into the limelight for every retailer. In this new reality, adjustments regarding the format of store and portfolio alone won’t work, a fundamental reconsideration in making the consumer journey’s from browsing to enjoying the product in a hassle-free manner is essential. 

ABCDE of New Retail

To be in the race, retailers are facing an onslaught of immense pressure from all fronts. With the spending power of consumers on a decline, commodity prices and global demand on a rise in an evolving technological retail environment, competition is getting tougher by the day. Retailers need to understand that the consumer is on the lookout for the basics i.e. ABCDE – Augment the Brand experience by Connecting the consumer and Delivering the best technology Experience. To stand out in these unprecedented times, retailers need to design better applications to enhance each component of the consumer shopping journey. 

Since the lockdown, a lot of changes have been observed in consumer purchase behaviour and retailers are working on providing the best services to their customers by ensuring the delivery of right products to right consumers at right time. Market reports show that consumers have shown an increasing preference towards digitization be it ordering the product online or making a contactless payment. When retailers are providing one or the other convenience to their consumers at every point of time during their daily shopping, how should the fact of giving convenience to consumer pocket be ignored? Return of confidence will help unleash a consumer rebound and so will spending. 

A Convenient Way of Financing

Fortunately, the dream of every shopaholic is now a reality with the idea of Buying Now and Paying Later (BNPL), a new version of lay away which often includes an interest-free period in comparison to a credit card. Among the various powerful a new opportunity in this unimagined crisis, BNPL is a new financial revolution in making retail future fit. 

At a global level, the BNPL market is expected to grow from $7,320.6 million in 2019 to $33,638.3 million by 2027 i.e. at a CAGR of 21.2 percent. At a company level, on processing payments from lenders Pine Labs payment terminals revealed Rs 1,700 crore worth of sales through the BNPL option in October The organization has seen a 49 percent expansion in consumer durable purchases in July- September quarter. 

BNPL has proved to be a win-win solution for merchants, BNPL companies, and consumers. Participating merchants with BNPL are required to pay a fixed fee of 4-6 percent of the sales price as revenue. Even though it is a steep sum, volume benefits and retained consumers are key to the business model for the merchants. However, some companies do charge penalties to the consumers in case of a payment default. For consumer, it is a no-cost payment on a later date option. 

Major e-commerce players during their ‘Big Billion Days’ and ‘Great Indian Festival’ partnered with financial services companies to come up with offers promoting digital transactions instead of cash on delivery. During the festive months, BNPL services made an appearance along with conventional digital payment methods. More and more people embraced the offerings of BNPL, which includes instant credit at no extra cost for small-ticket purchases, instant refunds and a faster and safer checkout process. 

BNPL has flourished overseas post gaining success in Australia and proved to be a prosperous deal during COVID-19 emergency for the Indian retail sector too. 

Lizzie Chapman, Co-founder and Chief Executive of Indian digital lender ZestMoney stated that applications for products that offer the pay later option have increased by 2-3 times. As per the Global Payments Report 2020 by Worldpay, the expected increase in BNPL transactional volume is 54 percent. A rise has been seen in average order value for retailers with BNPL technologies as reported by Insightsiean 85 percent increase in Affirm, Klarna with 45 percent and Afterpay 20-30 percent.

The Younger Generation and Fintech

Experts say that with the advent of technology and penetration of the internet, modern-day tech-savvy millennials are found leaning ever more towards convenience, and the BNPL system offers just that. 

Jeff Gennette, CEO, Macy’s has given full credit to the young generation for their collaboration with Klarna. 

John Strain, Chief Digital and Technology Officer, Gap shared that their reach has shifted to the younger demography post the partnership with Afterpay. 

As the global user base of Afterpay crosses 11.2 million, almost half of these users are Millennials. Interestingly, a study by Forbes also found that 42 percent Gen Z and 69 percent of Millennial customers would be keen to avail of BNPL services if offered. Older ‘Bridge Millennials’ has led to the early adoption of BNPL as per Pymts' research. 

Facilities like low charges, ease of use, free of cost, and relaxed eligibility criteria are making BNPL a tantalizing concept. As per the survey conducted by Finder research, July 2020, 44 percent of consumers prefer BNPL for its convenience while 27 percent of users have shown less interest in using their credit cards. BNPL is not only giving ease to the consumer on the financial side but gaining popular choice these days at checkout process too. 

Harris Interactive shared around 9.5 million British citizens avoided the stores not offering BNPL. BNPL’s reach spans huge geography including North America, Latin America, Europe, Asia Pacific and the Middle East and Africa by targeting segments like Fashion & Garment, HealthCare, Consumer Electronics, SMEs, and large industries. Though there is no formal industry-wise data available for segment-wise trend gaining friction but partnerships done by AfterPay with fashion and apparel brands like Ray-Ban, STIO, ALLY shoes and others is expected to drive the growth of BNPL as the fashion and garment industry segment held the largest market share among end-use industry, contributing 52.2 percent in terms of value in 2019 as per Coherent Market Insights. 

CIBIL in their report mentioned that there is a steep rise in UPI hitting 1.34 billion transactions in June 2020. Thus, BNPL is a wise act that means to take formal micro-lending casually to retail clients, particularly to the sector that doesn't get simple credit from banks. 

BNPL and Indian Festive Season 

The adoption of BNPL was seen to be on the higher side during the Indian festival season with the help of apps like Simpl, LazyPay, Paylater, TruePay, and more. BNPL is slowly and progressively gaining control/ power in the Indian market, with an expanding number of traders, banks, and installment suppliers presently offering this service. All leading merchants across India from Amazon to Myntra, Yatra to MakeMyTrip, ZoomCar to Uber, Royal Sundram to SBI General Insurance, Upgrad to ExtraMarks, and Apple to Croma are revolutionizing their online shopping and payments ecosystem. 

This flexible no-cost EMI option is fulfilling consumer needs across all categories with a trust of UPI (unified payments interface) option. The participation by more than 30 brands with PineLab partnership and banks for campaigns such as #ChotiEMIPeBigCeleberations and #KhushiyoonKiUnMasking was highly appreciated by banks like Kotak Mahindra, Federal, Axis, and BOB Finacial Solutions. Not to miss even US-based brand Sezzle has already launched a pilot and is currently in process of integrating with UPI Platform too. 

MaddyGaiman, Manager of U.S partner at Fintech company Klarna appreciated BNPL as it is a more flexible payment option than credit cards. The catch is that stores with BNPL are having a higher conversion rate as well. 

Financial Disruption

On the one side where the BNPL industry is growing substantially, the status of consumer protection still needs clarity. With no official default rate numbers being available, Anil Pinapla, CEO of Pine Lab mentioned that banks are in a position to control the circumstances. ZestMoney pins its default rate at under 5 percent. Vivifi, and likewise Flexpay, gauges its default rate to be 4-6 percent because of troubles in assortments during the pandemic and its below- prime and low-pay borrower base. 

Consumers are looking forward to smarter ways for better financial control and stability and retailers can continue to grow with the consumer empowerment given by BNPL in this unpredictable economic environment. 

According to Parijat Garg, a Digital Lending Expert, “One would need to take the default rates at face value, on the grounds as there is no quarterly announcing system for these banks. However, thinking about the patterns in the business, the middle value to default rate must be above 10 percent.” 

Word of Caution/ Innovation

Like they say, “There is an opportunity in every crisis and the deeper the crisis, the better the opportunity can be” - the pandemic is serving as a catalyst for change, where initiatives like BNPL are helping in increasing the consumer's purchasing power. 

A report by Pymtns research mentioned, “These systems are also beneficial to businesses, with many reporting that consumers spend 55 percent more at stores when offered BNPL options.”

In the coming times, the retail industry is expecting to enjoy the benefits of this financial technology in the form of an increased share of wallet from existing consumers as well as high brand awareness with new customer acquisition. However, one should not forget that while BNPL is unlocking and tapping a new customer base by diversifying its credit portfolio, it is also encouraging reckless spending too. 

Cradify survey showed, ‘doubts in consumer mind about overspending’ and 22 percent of consumers have no clarity about the terms and conditions of BNPL as per the Ascent study. 

With BNPL consumers have access to instant gratification and thus in line with the advent of this new technology, Afterpay has labeled their buy now, pay later offering ‘enjoy now, pay later’. Though consumers these days are seen to be behaving differently, they are listening, thus retailers need to modify their activities accordingly. Your voice should be authentic and compelling while converting consumers' interest in this new scenario. BNPL has designed the best transparent credit framework with access to short-term credit but one can’t forget – it is still a ‘credit’. The question to be explored is – will new entrants help in changing consumer perception about credit in the coming future?

(Inputs by Dr Pooja Misra,  Assistant Professor – Economics, Birla Institute of Management Technology)