One of the many surprises delivered by calendar year 2020 was a booming increase in Buy Now, Pay Later (BNPL) transactions. Initially popular with millennials and Gen Z, this modern take on installment loans is now seen as a viable alternative to credit cards for consumers across the board.
Financial institutions with well-established credit card programs are moving quickly to establish their own BNPL programs. Rather than view Buy Now, Pay Later as a threat to card program revenue, they see the new payment method as key to customer retention.
How Buy Now, Pay Later transactions work at the point of sale
BNPL is a point-of-sale microlending payment solution. Merchants can offer BNPL as an option at checkout. The BNPL program provider collects the consumer’s information and determines credit worthiness. If the consumer’s details pass muster and the consumer accepts the agreed payment terms for the microloan, the provider can issue payment to the merchant via a virtual card or through direct ACH integration.
For consumers, lower interest rates and more time to pay
For consumers, the zero- or low-interest loan offer during the agreed-upon repayment period is one advantage BNPL offers over traditional credit cards. Much like layaway, consumers can pay in increments over the course of several months with no or minimal additional fees attached to a loan paid on time. In comparison, credit card interest rates begin kicking in after one month, and hover around 14% to 15% once they do, according to Federal Reserve data.
For merchants, higher conversion rates and larger orders
With shopping alternatives just one click away, consumers are insisting on better experiences. Forty-two percent of U.S. consumers said they would walk away from a purchase if they couldn’t use a preferred payment method. But fear of losing a customer to a competitor is only part of the reason merchants are embracing Buy Now, Pay Later transactions. Equally motivating are claims by BNPL providers of a 40% increase in order value and a 30% increase in conversions.
For financial institutions, additional revenue and greater customer satisfaction
Marcus by Goldman Sachs was one of the first large financial institutions to embrace Buy Now, Pay Later. Last August, it announced MarcusPay, a no-fee loan that lets travelers book flights on JetBlue and pay for them over time at a fixed interest rate. In the fall, Chase announced My Chase Plan, which allows cardholders to select a recent purchase over $100 and choose to pay it back over a set timeframe from 3 to 18 months.
With customer bases numbering in the tens of millions, large banks have little to lose and much to gain from launching their own version of popular BNPL programs. Their long-standing relationships with cardholders mean they can present BNPL options at the right moment during the customer lifecycle — for example, by offering a BNPL loan for new furniture to a customer who has just bought a house and acquired a mortgage — rather than simply trying to win over a shopper during checkout.
The banks can also leverage existing merchant relationships to construct a value proposition that works for all parties. And, as their BNPL programs scale, they can combine the wealth of customer data they already collect with additional data from BNPL transactions and loan performance over time.
A key obstacle to large-scale BNPL programs for financial institutions has always been infrastructure. It was hard to make the business case for integrating thousands of merchants for short-term, small-dollar loans. But the ability to issue a loan via a virtual card created through a modern card issuing platform like Marqeta makes it possible for a bank to pay a merchant for a purchase up front without the need for additional integration. Cards created on the Marqeta platform can also be customized with dynamic spend controls that ensure loan proceeds are spent for approved purposes only.
Modern payment infrastructure has made more flexible payment experiences possible, and has provided a path for financial institutions to provide customers with flexible payment choices that suit their personal budget and spending habits.
Read more in our Buy Now, Pay Later series: