In 2018, 1.6 million U.S. consumers used Buy Now Pay Later (BNPL) financing to make a purchase. This year, that number is projected to hit nearly 60 million.
Clearly, consumers value BNPL.
According to an analysis conducted by Shopify, which introduced BNPL financing as a service that all of its merchants can offer to their customers, adding BNPL as a payment option at checkout can lead to a 50% increase in order value and a 28% decrease in cart abandonment. Clearly, merchants benefit from BNPL. Looking back on the last five years, it’s easy to say that BNPL has created a win-win for consumers and merchants and that its emergence was inevitable.
However, this wasn’t so clear at the beginning. When BNPL first started making inroads into merchants’ checkout pages, the benefits were still hypothetical and the risks were very real. Instantly approving a customer for a loan at checkout and then servicing and collecting on that loan after the purchase was a daunting proposition for merchants at the time. They need to consider a whirlwind of questions. How to underwrite these loans from a credit risk perspective? How to identify and mitigate fraud and facilitate and track loan repayment? How to process and refund purchase returns when the customer is still paying off the product? How to collect on delinquent payments and know whether that collection experience will damage their customer’s affinity for the brand?
This is where the third-party BNPL providers come into the story.
Companies that pioneered the modern version of BNPL partnered with merchants to integrate on-demand financing into the checkout experience. The BNPL providers delivered the capital for lending, facilitated the underwriting, and created a separately-branded experience for customers to manage their payments and deal with any delinquencies. In exchange for a per-loan fee that ranged from 3% to 9% percent of the total transaction, BNPL providers took the operational lift and the credit, fraud and brand risk off of merchants’ shoulders and enabled them to experiment with BNPL.
Those experiments produced exceptional results. The question now is, what do merchants do next?
The next wave: BNPL 2.0
Here’s another stat for you: 61% of BNPL users would rather use a BNPL service offered directly from the merchant they’re buying from than go through a third party.
That makes intuitive sense. Consumers are choosing the merchant because they value the merchant’s products and brand. When they use BNPL services provided by third parties it’s because they have to, not necessarily because they prefer to.
All things being equal, merchants should prefer to offer BNPL directly as well. There are three reasons for this.
First, as the survey data above suggests, it’s what consumers want.
Second, the economic benefits for merchants are too significant to overlook. BNPL enabled by third-party providers is expensive. At best, the per-transaction costs are comparable to a those of a premium credit card. At worst, they are two to three times more expensive than that. Cutting those costs out gives merchants’ bottom lines a significant boost.
Third, and most importantly, BNPL has unlocked a set of new customer engagement opportunities that today’s merchants are completely missing out on.
The customer engagement opportunity
Merchants tend to think about BNPL as a transactional tool for creating a more seamless and convenient purchase experience for their customers. That’s why the metrics that merchants have traditionally cared about when it comes to BNPL — average order value, cart abandonment rate — tend to be measures of sales efficiency.
What happens after the sale isn’t important. Or so merchants have believed.
The truth is that BNPL isn’t a transactional product. It’s a relationship product. How do we know this?
Just look at third-party BNPL providers. If BNPL were purely a transactional product, you would expect the post-transaction experience provided by third-party BNPL providers to be relatively bare-bones. They would help consumers set up automatic payments for their loans. They would give consumers a portal to check on the status of their loans and see their payment history. They would, when necessary, work with customers who fall behind on their payments and try to get them back on track. And that would be about it.
That’s not what third-party BNPL providers do. Third-party BNPL apps aren’t bare-bones payments and loan servicing apps. They are shopping apps, designed to help consumers discover the next products and services they want to purchase. They are loyalty apps, designed to reward consumers for continually interacting within the provider’s ecosystem. And they are financial services super-apps, designed to help consumers solve a range of related financial challenges, from saving money to making everyday purchases.
Third-party BNPL providers take advantage of the fact that consumers are required to interact with them (in order to repay the loans) to layer a variety of value-add products and services on top of those interactions. They transform the loan servicing process into a massive and ongoing cross-sell opportunity.
And the initial BNPL transaction? For third-party BNPL providers, that’s simply an efficient way to acquire customers.
The question for merchants is: Do they want to continue to treat BNPL as a transactional tool to boost sales, or do they want to take more control of the post-transaction BNPL experience and use it to create new customer engagement opportunities?
Taking control of BNPL
I believe that merchants should, and indeed will, take more control over the end-to-end BNPL process. The upside — in terms of the customer experience, the unit economics, and the ongoing opportunities for engagement and cross-sell — is simply too big to ignore.
In order to do this successfully, merchants need to keep a few things in mind:
Build out your BNPL stack incrementally
The goal is to retain a relationship with the customer after the initial transaction is completed. Start small. Assemble the components necessary to meet that goal: a flexible and robust general ledger, a partner bank or embedded finance platform for originating the loans, a debt facility for funding the loans, and an integrated system for managing cross-sell and loan servicing.
Leverage your data
You know your customers better than anyone else. That insight needs to drive every element of your holistic BNPL strategy, from underwriting and pricing to cross-sell and rewards. You don’t need to outperform third-party BNPL providers for all customers, just your customers.
Find partners, not vendors
Perhaps the biggest concern that merchants have in taking more control over the financial products and services they offer is that financial products pose both technological and regulatory challenges. Offering loans to customers comes with significant compliance requirements. When choosing companies to work with to assemble your BNPL stack, it is critical to select companies that will partner with you and help you build the necessary program management competencies, in addition to solving for your technology needs.
Merchant-centric BNPL is now possible. And because it’s possible, it’s now inevitable.
John MacIlwaine is the CEO and co-founder of card platform Highnote.