The “buy now, pay later” (BNPL) market is hotter than ever. With a strong presence on major retailers’ websites and increasing brand awareness among consumers, BNPL is receiving growing attention from the world’s top banks, lenders, and credit card providers.
While the concept is nearly a century old, Forrester has been tracking the “reemergence” of this deferred payment option since 2017. As of now, the market has been mostly defined by a few leading BNPL providers such as Affirm, Afterpay, Klarna, and Zip. But with no signs of slowing, banks would be remiss to ignore this fast-growing market.
To help banks understand how they can tap into BNPL, my colleague Nicole Murgia and I recently published a report, The Buy Now, Pay Later (BNPL) Opportunity. Here are some of our key findings:
- BNPL usage is growing across consumer groups. Since 2019, the usage of BNPL has more than tripled in the US. While adopters of BNPL tend to skew younger, with Millennials and Gen Zers making up the majority, there are users across all age groups. In addition, contrary to some assumptions, BNPL is used pretty evenly across all income levels, although when it comes to credit, BNPL tends to be more attractive to those with “fair” or “poor” credit scores.
- Today’s three most common BNPL business models each have their own pros and cons. We identified the three most common B2C BNPL business models: (1) merchant-integrated; (2) credit card add-on; and (3) virtual cards. Some firms operate across more than one of these business models. Each model comes with its own set of pros and cons. For example, merchant-integrated BNPL solutions are seamlessly integrated into retailers’ sites throughout the shopping journey, which drives high consumer awareness. But there’s a high cost to driving brand recognition, and scale necessitates merchant relationships. Whereas credit-card BNPL add-on solutions may come with an established brand and existing cardholder base, the lack of checkout integration means it may not be top of mind for shoppers.
- Several factors will shape the future of the BNPL market. BNPL is an incredibly popular (and controversial) topic in the financial services industry. In the next few years, we expect that laws and regulations that protect consumers of this payment type will emerge worldwide. Countries including Australia, Sweden, the UK, and the US have taken steps toward regulation, and even banks, including Barclays and Capital One, have taken action. BNPL appeals to many consumers because it lacks credit reporting. With the misuse of BNPL among consumers becoming public, however, credit bureaus are rolling out BNPL capabilities to enhance underwriting decisions and promote financial inclusion.
- Banks and lenders that want to participate must choose their route to market wisely. There are several routes to market for banks and lenders to consider if they want to participate in the BNPL market. One option is to offer capital, credit expertise, and licensing to BNPL firms. Another is to add a BNPL offering on to existing credit cards: this may seem the most efficient way to enter the BNPL market, but it may also be the toughest. Some banks are launching a standalone BNPL service, but this route may prove challenging, since 36% of US online adults already have a preferred BNPL provider. And while larger BNPL companies have been scooping up smaller players to aid their geographic expansion, banks and other financial services firms clearly have an opportunity to buy or partner, as well.
This post was written by Principal Analyst Alyson Clarke and it originally appeared here.