How ‘Buy Now Pay Later’ is Disrupting Finance
Younger generations are ditching credit cards for more user-friendly, engaging and budget-focused alternatives.
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A new wave of Buy Now Pay Later (BNPL) services, which allow consumers to buy an item and pay later in interest-free instalments, have lately been shaking up the traditional credit card business. As a low-commitment, user-friendly and budget-focused alternative to credit cards, BNPLs are particularly favoured by tech-savvy Millennials and Generation Z, who are wary of credit cards.
CREDIT CARDS REIMAGINED: MORE FREEDOM, LESS COMMITMENT
Raised in the aftermath of the 2008 financial crisis and graduating into tough job markets, Generation Z and younger Millennials are more cautious about spending, debt and hidden fees than previous generations. As digital-savvy consumers, they also have new demands for financial services. They seek convenience and ease of use, and they value products that integrate effortlessly into various other applications they are using.
With their high interest rates, strict requirements and confusing jargon, traditional banking services are not appealing to this new generation of consumers. Hence, the major Buy Now Pay Later service providers, such as Klarna and Afterpay, focus primarily on this customer segment with their accessible approach to personal finances, vibrant branding, and creative collaborations with lifestyle brands.
The Buy Now Pay Later services essentially offer the same benefit as using credit cards, minus the commitment and interest fees. Users can start using the services instantly without any application processes or background checks. They can also defer payments for longer periods than monthly credit card billing cycles, which means more freedom in managing cashflows.
The Buy Now Pay Later business model generates profits mainly from the merchant fees and the late fees collected from customers. They typically charge merchants higher than credit card companies. Merchants are usually happy to pay the premium, as flexible payment options like BNPL increase basket sizes and conversion rates. Moreover, BNPLs also help brands reach new customer segments. For example, global retailer Gap partnered with Afterpay to target younger demographics who may not have been able to afford shopping with them before.
SOCIAL E-COMMERCE DRIVES FURTHER ADOPTION
Another change driver that’s closely tied to the Buy Now Pay Later boom has been the rise of social e-commerce. By bringing social media and e-commerce together, social e-commerce allows users to shop directly from social media apps, such as Instagram and TikTok, without leaving the platform.
Whether they’re active in the social e-commerce landscape or not, this creates a need for all businesses with an online store to optimise their checkout experience to remain competitive, which further highlights the value the Buy Now Pay Later model brings into the e-commerce landscape.
As being able to shop directly from one platform becomes a central component of driving conversions, traditional payment methods may prove increasingly inconvenient to both customers and vendors in the future. With the digital-native generations forming bigger segments of the customer landscape, more financial institutions may venture into the lifestyle and social media landscapes, further blurring the lines between entertainment and finances.
EMPOWERING PERSONAL FINANCES OR ENCOURAGING MORE DEBT?
While the Buy Now Pay Later service providers often brand themselves as agents that give consumers more control over their finances and help them avoid accumulating debt, there is also the risk that they may end up doing exactly the opposite.
With its ease of purchase, the Buy Now Pay Later option can make it dangerously easy for people to spend beyond their means and, in the worst-case scenario, trap them in an unsustainable circle of debt. This is particularly because many of the BNPL service providers collect significantly high late fees, which may be as much as 30% of the invoice.
Since most of the BNPL solutions are focused on non-essential markets such as fashion and luxury, there are concerns that they may encourage impulse buying and promote a hyper-consumerist culture. Especially in the non-US Western markets, where holding debt at young ages is not that common, it can also drive young people to spend more without fully understanding the consequences.
For instance, according to a recent survey by Cardify, nearly half of the surveyed consumers report spending up to 40% more with a Buy Now Pay Later plan. As the use of such plans nearly quadrupled in 2020 with the impact of the Covid-19 pandemic, the increasing concerns have also prompted some countries to introduce new regulations for these services. As the adoption rates increase worldwide, more countries are likely to take new measures to regulate the field.
FUTURE DIRECTIONS AND CROSS-INDUSTRY APPLICATIONS
Being the latest wave within the larger fintech industry, BNPL services are poised to further disrupt the traditional banking landscape. Considering the long-term financial impact of the Covid-19, particularly among young generations, Buy Now Pay Later services will likely see accelerated adoption in the future. With established players like PayPal entering the competition, the market will get increasingly saturated and major banks, fintech start-ups and tech giants will be competing for consumer attention and market share.
While the Buy Now Pay Later model has so far focused mainly on retail and e-commerce, the business model is applicable to various other industries. Thus, it is plausible that BNPL services will expand to other sectors, such as groceries, as well as physical stores, paving the way for more omnichannel applications. As the market matures, Buy Now Pay Later applications may also transform into more holistic platforms where users can get insights into their spending habits, receive personalised budgeting tips, and discover new products based on purchase history.
Finally, considering the differences in costs of living and salary cycles in different countries, BNPL services may serve different needs in different economies. While it may be just another payment method in advanced economies, the BNPL model may potentially be a game-changer in developing countries and bring unbanked populations into the mainstream economy.
ASSESS HOW THESE SHIFTS WILL IMPACT YOUR ORGANISATION’S FUTURE
To write this article, Futures Platform’s futurists have collected the data from different phenomena and studied linkages between them. Here are the three colliding phenomena that are shaping the future of financial services and alternative payment methods.
NEW PAYMENT METHODS
Currently, ca. 95% of global commerce takes place using traditional methods of payment, whereas the new online systems cover only the remaining 5%. However, thanks to digitalization creating new alternatives to conventional payment methods, this situation is steadily changing. Besides new ways to move money, also entirely new currencies are being born.
SOCIAL E-COMMERCE
Social e-commerce means combining commerce with social media activity. It enables buying items without leaving the app, making purchasing seamless and fast. Acting within social media lowers the purchase threshold and enables multiple different forms of engagement with the buyer and the seller, depending on the used platform.
SOCIAL MOBILITY
Social mobility refers to the movement of an individual, family or generation from one social class to another. In recent decades, it has become harder for young people to maintain or exceed the living standards of their parents. The disruption caused to markets by digitalisation is one of the main reasons behind the worsening mobility patterns. Unless necessary measures are taken, poor social mobility will have far-reaching social, economic and political consequences.
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