“Buy now, pay later” financing was part of a retail revolution before the pandemic crashed into our lives in 2020. Now, with the economic recovery on everyone’s mind, retailers are more eager than ever to promote sales and retain customers by helping them pay for purchases by installment — the essence of buy now, pay later.
Businesses interested in this purchase option, called “BNPL” for short, should first consider what it takes to provide credit to shoppers at any point of sale, real-world or virtual.
One-pager to get you started on embedded retail financing
What is BNPL, and why do retailers and consumers agree it’s a viable option for funding purchases?
Worldwide, BNPL financing helped buyers make specific purchases or spend up to pre-defined amounts with a specific retailer, repayable in installments to the tune of about 285 billion in transaction volume in 2018. And that number is expected to hit $680 billion by 2026, for a compound annual growth rate of 13.2%.
As enumerated by the Motley Fool in a multiple-response survey conducted in July 2020, US consumers use BNPL for specific reasons:
- 39.4% to avoid credit-card interest
- 38.4% to make purchases that wouldn’t otherwise fit my budget
- 24.7% to borrow money without a credit check
- 16.3% prefer not to use credit cards
- 14.4% can’t get approved for a credit card
- 14.0% have maxed-out credit cards
- 3.3% I don’t have a bank account
For businesses, meanwhile, the trend toward BNPL financing is fueled by:
- Innovation – Lending-technology makers have improved credit origination and processing with artificial intelligence and dynamic scoring models, in addition to automated administrative functionality
- Convenience – Credit application occurs right before the actual sale, either at the register, via mobile device, or as a prelude to self-directed online purchases
- Consumer disenchantment with credit cards – As a means to unsecured financing, younger consumers view credit cards as unfair to consumers, according to PaymentsSource.
- Broadening acceptance – Consumers and retailers have become more aware of BNPL financing options
Though the public-health crisis has put BNPL in the spotlight, it was already on its way to mainstream acceptance among consumers and merchants alike. One marker of this was Walmart’s pre-pandemic engagement with online installment financier Affirm.
“Retailers that are keen to offer installment financing at a point of purchase must consider how they want that done,” says Elena Ionenko, co-founder and chief operating officer of lending software maker Turnkey Lender. “It’s a stark choice: either hire a third-party lender to control the whole operation, or run software made and supported by a lending-technology specialist like TurnKey Lender.”
Third-party lenders let retailers skip credit underwriting altogether, and they get paid on the spot and in full for financed purchases. But in this approach, everything about the financing is between the consumer and the third party. The retailer is just a middleman.
Besides Affirm, names like Square, Bread, and Lightspeed provide fully outsourced versions of “shop now, pay later” financing.
But for retailers inclined to retain control of their lending, TurnKey Lender is a major player, with operations on three continents. As a BNPL-software maker, the fintech company equips retailers with advanced, cloud-based lending functionality for financing, in-person and online.
BNPL-software providers stack up the benefits of plug-and-play lending for retailers of all kinds
Lending software offers 13 specific benefits to retailers planning to start or streamline internal BNPL operations.
- Affordability through modularity. With TurnKey Lender, a retailer can start small and add functionality as needed
- Scalability lets a POS-financing program grow as the business grows
- Higher conversion rates at checkout via fast and accurate application processing
- Increased operational efficiency supported by artificial intelligence to enable smart decisions
- Unique underwriting rules retailers can set, using their own AI-supported decision and control criteria, to terms that are both profitable and safe from a risk-management perspective.
- Improved portfolio yield from technology that lets retailers optimize portfolio yield by working only with the most profitable customers along with predictive models to pinpoint optimal rates and terms
- All transaction fees go to the retailer, opening the door to a significant new profit center
- Client-data integrity and security ensure that customer data isn’t shared with third parties
- Mobile capabilities ensure secure, on-the-spot service whether the customer is online or in-person
- IT support and customer service to answer the retailer’s questions in real time, 24/7
- Business metrics (via AI-powered analytics) to help retailers get a deeper understanding of customer behaviors and preferences
- Client-data integrity and security to guarantee customer data is not shared with third parties
- Enhanced brand loyalty as touchpoints between the retailer and its customers become opportunities for up-selling and loyalty-program enrollment.
“Information gleaned from loan applications and credit-bureau scores provide useful information, but it rarely tells the financing applicant’s whole story,” says Ionenko. “But our buy-now-pay-later platform puts AI to work on making more dynamic credit decisions, so that retailers can approve low-risk loans using alternative inputs around budgeting, spending, and other financial indicators to provide a fuller picture of the applicant.”
With merchants facing headwinds from a pandemic prolonged by the appearance of variant strains, it makes sense to give customers the option to pay for items over time through BNPL-installment financing. After all, it’s been shown to calm ticket shock, build loyalty, and help retailers close sales.