By Authors
Mukund Rao, Chief Business Officer, Banking, Financial Services & Insurance, Mindtree
Abhik Kar, Principal Consultant, Banking Practice Lead, Mindtree
How banks can turn the equation towards responsible lending
Buy Now Pay Later (BNPL) is a significant disruption in payments methods and ecommerce financing that has rapidly become popular in the pandemic’s aftermath. Amidst restrictions and lockdowns there was an ecommerce surge in the last 24 months. The latest reports revealed a 4x increase in retail purchases using BNPL in the US alone, marking an increase from $24 billion in 2020 to $100 billion in 20211 . Globally, the ecommerce market amounts to trillions of dollars with an incredible potential to grow YoY.
BNPL brought unique propositions of convenience to retail customers with the flexibility to get interest-free credit. This was made available to those without credit history as well, with the option to pay at future date in a few weekly or monthly installments. The entire ecommerce checkout experience stands apart with this alternative payment method that provides instant credit facility in just a click. Digital KYC, remote onboarding, and access to an instant credit line are factors driving the soaring acceptance of BNPL across the globe. Customers have grown to relish BNPL with larger basket sizes and no extra pressure on their monthly budget. In parallel, merchants also love BNPL as it drives higher average order value and increased cart conversion.
Fintechs are the early movers who had already launched the BNPL model and started tapping this emerging market demand. Affirm, Klarna, Afterpay, and Zip are some of the names who disrupted traditional financial products with their innovative approach and have acquired customers multifold in a short timeframe. Some of them have already built remarkable BNPL platforms with a strong network of merchants. Banks are facing a threat as these new players are targeting their merchant networks and credit card portfolios. If BNPL is ignored, banks’ bottom-line will eventually be cannibalized by these players and they will lose customer trust, loyalty, and market share.
The picture remains incomplete if we ignore how BNPL has disrupted the traditional short-term small ticket lending market which was dominated by the revolving credit card business. Now, the sub-prime or underbanked segment with low or no credit history also has access to credit, using BNPL. But the credit risk is still not fully addressed. Australia’s Afterpay reported a loss of $156.3 million and Zip had losses of $652 million in just one financial year due to delinquency; these losses are 700% and 3000%, respectively, higher than the previous year2. A large number of young users are impacted for non-payment and often levied with higher late payment charges. This will lead to massive bad debt for BNPL providers if proper checks and balances are not introduced. Moreover, Fintechs lack scale and expertise especially loan servicing and collections.
On the other hand, banks are well-equipped and have ages of experience in handling credit, collections, and loan lifecycles. Banks should play the role of responsible lenders and play a role in the BNPL equation either directly, or by partnering with BNPL enablers. Banks have a wealth of insights from terabytes of transactions, customer, and merchant data. These insights will help banks to personalize the service and make this experience more pleasing for customers. In this white paper, we have discussed the reasons why banks should not shy away from the BNPL revolution and the strategies for banks to penetrate the BNPL market.
Download Whitepaper to read more
