The Rise of Buy Now Pay Later

According to research by the University of Cambridge Judge Business School, digital payment brands reported a year on year growth in transaction volume in excess of 20% for Q1-Q2 2020 when compared to the previous year, a pattern which has continued to today.

One such payment channel which has seen a dramatic increase in popularity over the last couple of years is the point-of-sale financing option to buy now pay later – especially among young people.

The Millennial and GenZ generations have found themselves in a strange place when it comes to finance. Growing up in the shadow of the world’s largest peacetime financial crisis has left them with a distaste of and mistrust for traditional banks and they are looking elsewhere for their economic needs.

Combine this with the aspirational nature of many Instagram, TikTok, and YouTube accounts which are constantly pushing the idea that everyone out there is living a #BestLife (forgive me) and the products they are promoting are part of the secret to unlocking yours. There’s also the fact that members of these generations are often struggling to acquire significant assets such as property, therefore it’s little surprise they choose to go for quick hit shopping highs instead.

The Appeal of Buy Now Pay Later

It has been predicted, by 2024, by now pay later will have doubled from 2.1% to 4.2% and overtake cash on delivery and charge and deferred credit card to become the fifth most commonly used digital payment method. Coherent Market Insights has also predicted the global buy now pay later platforms market will surpass US$33,638.3 Million by 2027 – up from US$5,001.4 Million in 2017.

The stores and fintechs which are driving buy now pay later typically hold more and deeper data on their customers than a traditional bank does. Where a bank might know where and when you spend your money, ecommerce, search engine, and social media brands know exactly what you’re spending it on. They even know what you were looking at before you searched for the product in question.

Not only does this allow these brands to better market their core products to young and tech-savvy customers, but also clues them in as to whether they are likely to abandon a cart, spend very little, or any other factor which could be considered undesirable from a pure sales perspective. It may then be these customers will respond favorably to buy now pay later options being presented to them and can be marketed at thus.

“Our annual POS Financing Survey shows that consumers are getting used to seeking merchant-subsidized credit at point of sale: about 60 percent of consumers say they are likely to use POS financing over the next six to 12 months,” reports McKinsey. “Additionally, merchants are seeing value in these solutions, as most enhance cart conversion, increase average order value, and attract new, younger consumers to the merchants’ platforms. However, the incremental impact of such solutions varies by merchant size and category.”

Buy now pay later therefore opens up your brand to markets and customers and increases the amount they will potentially spend. Let’s say for example, a customer is on your website trying to pick out a new smartphone to replace their old model. They will look at their budget and have a set amount they can afford to spend on their new phone.

However, if they see the store has the option to buy now pay later, and the offering seems reasonable – say, three payments with no interest – they may decide they can afford to spend a little more on their new device. Now, because of buy now pay later, you’ve sold a higher-end product to that customer than you otherwise would have.

These smaller financial interactions also give fintech brands the opportunity to reach a potentially enormous customer base traditional banks have often struggled to connect with. Many younger people are unable to access larger forms of finance, and few have large assets on which to secure it. Buy now pay later, not only gives these demographics a road into finance and allows them the opportunity to start building a strong credit rating but allows them to do so in small and manageable chunks.

Then there is the fact that these options are often offered through the same digital platforms customers are already using. If it’s not the retailer themselves offering the buy now pay later option, it’s a closely linked payment option such as PayPal. Customers are already comfortable with the brands and the cost for retailers to start offering these options is small. These platforms can even offer basic banking options – such as allowing customers to save for future purchases – providing another layer of trust and service to the offering.

Regulation

Obviously, any credit/debt relationship is open to abuse from both the creditor and the debtor’s perspective and care must be taken to ensure all lending is carried out in a responsible and ethical manner.

We mustn’t forget these are – for the most part – very young people engaging with these payment options, and they rarely have the experience and financial nous to make sensible decisions about their money. Indeed, how many of us made the mistake of getting a credit card when we were 18 “for emergencies” and ended up going a bit wild with it?

A big part of the appeal with buy now pay later is in the ease with which it can be accessed and arranged, but that is no excuse to potentially take advantage of people who may be vulnerable to addictive behaviors and impulsivity.

It’s therefore critical that fintechs properly assess the affordability of buy now pay later products at the point of sale. Due to their very nature, buy now pay later products typically avoid the level of regulation applied to traditional consumer lending, but the industry can expect regulatory bodies to step in eventually. The UK government has recently announced buy now pay later will soon be regulated in that country by the Financial Conduct Authority, so wheels are already in motion in that regard.

“Buy-now-pay-later can be a helpful way to manage your finances but it’s important that consumers are protected as these agreements become more popular,” said John Glen, Economic Secretary to the UK Treasury. By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford – the same protections you’d expect with other loans.

What Does the Future Hold?

Buy now pay later has seen a particularly noteworthy boost in APAC countries. The 2021 Global Payments Report has found buy now pay later to be the fastest growing online payment option in Australia, India, Japan, Malaysia, New Zealand, and Singapore and its market share in the region will more than double over the next four years. New Zealand sits as a particular outlier with its buy now pay later growth predicted to account for 38% of all online transaction by the end of the forecast period.

Buy now pay later is also likely to be especially popular in countries such as India, where there is lower credit card penetration and customers have limited access to traditional and formal credit.

Some of the players which have come to the fore during the rise of buy now pay include disrupters such as Grab, GoJek, Razer, and Oriente. These will be the brands to watch as we move forwards as they are the ones who will continue to innovate in this space and jump on changing demographics and consumer preferences.

Naturally, the COVID-19 pandemic has had a big role to play in the rise of buy now pay later. As people have been stuck at home and brick-and-mortar shops have been forced to close, people have been spending more than ever with ecommerce brands. This has therefore increased their exposure to buy now pay later options and made them significantly more tempted as customers seek ways to keep themselves active and entertained during periods of lockdown restrictions.

Fintech markets with the most stringent lockdown measures were found to report even higher growth when compared to more relaxed countries. This makes sense as people in these countries would have even fewer options for non-ecommerce-based shopping and would be hungrier for distractions from the crisis.

Naturally, this has led to digital payments brands innovating to offer more products with a massive 60% of customers confirming that COVID-19 had directly influenced them to do so. A further 32% responded that they had not launched a new product but were presently planning on doing so, or already in the development process. The most prevalent change (38%) reported by these firms was offering new payment channels for their customers.

What remains to be seen is whether the pattern will continue after the danger has passed. Will buy now pay later platforms be able to continue this momentum, or will it begin to wane as people begin to get back to some semblance of normality?

Final Thoughts

Buy now pay later is offering significant opportunities to merchants, fintechs, and customers. It remains to be seen whether the impetus created so far will continue into the future as predicted, or whether it will be replaced by something else in this rapidly evolving and fluid industry.

Asian retailers looking to boost sales, increase conversions, and avoid the dreaded abandoned shopping cart would do well to get on the buy now pay later train now and begin offering this option to their customers.