Digital technology and integrations between banks, fintech, and retailers are not just changing the how but when of payments. As a result, the way consumers pay for their purchases includes an increasingly popular option called buy now, pay later (BNPL).
Taking out a loan for a purchase as small as $35, which is basically what BNPL is, would never have been considered in the past. It would have been far too cumbersome for both consumers and lenders. But thanks to the prevalence of application programming interfaces (APIs) in the financial industry, the process is now as easy and seamless as a credit or debit card transaction.
Nearly every major retail store and site now offers customers the option to pay with a BNPL. The players in that space already include the Swedish fintech Klarna, as well as the US-based Sezzle and Affirm. The name behind many store credit cards, Synchrony, also has its offering, and now even bank-branded credit cards like Citi and Chase, as well as Amex, give their customers the option to use BNPL.
The space is heating up even more with Apple’s announcement that it would offer its own BNPL called Apple Pay Later through a subsidiary of the company that has obtained lending licenses.
Use of BNPL has exploded, accounting for $100 billion in retail purchases in 2021, up from $24 billion in 2020, as reported in Fintech Times. The forecast for the market indicates that the trend is here to stay. The global market for BNPL is expected to hit $3.98 trillion by 2030 with a CAGR of over 45%, starting from 2021, according to Allied Market Research.
As we saw in Fintech’s Future: AI and Digital Assets in Financial Institutions, fintechs are making it possible for consumers to access credit and borrow on demand. The BNPL option is one iteration of that, a microloan that customers access at checkout through financial services that partner with the retailer.
Apple and APIs
A is for Apple and APIs, which enable the integrations that make BNPL possible
Apple Pay Later will be an option for shoppers to repay what was spent via Apple Pay in four equal installments spread over six weeks. What’s unusual about Apple’s move, as the Wall Street Journal reports, is that traditionally tech companies that have offered financial products have partnered with financial institutions to manage the risks of lending. But Apple is confident that it can handle it on its own because it has so much data at its disposal. (Read also: Behavioral Economics: How Apple Dominates Big Data.)
Just as banks do, Apple intends to use resources like FICO scores and credit scores to assess would-be borrowers. However, it has an extra advantage in managing risk, the Journal reports: “its giant store of Apple ID data for identity verification and fraud prevention.”
Apple is also reducing its risk by limiting the amount of the loan to $1000 per person, and lowering that maximum according to the individual score. Not relying on borrowers’ memory to make the payments when they are due, it set up an automatic opt-in for the installment payments by requiring users to link the BNPL service to their debit cards.
While Apple is taking on the burden of credit decisions itself, it is still relying on partnerships for some of the aspects of making a successful BNPL program. Goldman Sachs, which issues the Apple card, is also serving as the loan issuer and official BIN sponsor,” reports CNBC. For the interaction with vendors, it relies on Mastercard’s white label BNPL product called Mastercard Installments.
These functional partnerships are only possible now, thanks to the advance of API integrations. Fintech Times explains that the rise of “soft loans” is not due solely to the new shopping behaviors adopted during the pandemic but to the enabling technology being available at the right time: “BNPL products have thrived largely due to the APIs at their literal core.”
APIs are the digital equivalent of Velcro, connecting businesses through partnerships that allow data and payment options to flow through seamlessly. They are what enable fintechs to function, and now they are enabling retailers to effectively become the channel for microloans offered through BNPL options.
B is for banks that have adapted and evolved
Today’s banks have come a long way from the stuffy, slow-moving institutions of the last century. Back then all banking information was linked to paper, and transactions involved paper trails in the form of bank books, mortgage coupons, and carbon copies of credit card payment records and deposit slips.
The paper trail had to end when digitization took hold and expectations for faster processes became the norm. Not only did traditional banking account tracking become more streamlined, but financial institutions extended their embracing of digital capabilities to offer their digital-native customers more ways to borrow and pay. (Read also: Top 12 Use Cases: AI in FinTech.)
As noted in the 2021 McKinsey’s Global Banking Annual Review today’s banks are taking their cues from the successes of companies like Amazon and Netflix that “have taken existing services and transformed them into digital experiences that are now embedded in customers’ daily lives.”
That is largely the result of open banking, a standard imposed on financial institutions from regulations that first arose in Europe and the UK to allow third-party access to data through APIs. Such integrations enable new financial solutions that can better serve banking customers, drive new areas of business and improve efficiency. The industry has embraced the options to such an extent that there are now thousands of APIs in use in the financial sector.
Whereas loans used to be formal transactions people would undertake only for major expenditures like home renovations, they are now just incorporated into daily activities by people who opt for BNPL options at checkout. Banks who do so may win more BNPL business than the startups who have popularized it. PYMNTS discovered that most people interested in using it expressed a preference for BNPL plans from the banks that they already entrust with their money.
Credit Card Alternatives
C is for customers who demand credit card alternatives
Offering customers ways to pay a little at a time toward their purchase is not a new concept. But in the past, the purchases were not made on credit but through layaway. Now major retailers like Walmart have given up their layaway programs and embraced BNPL instead.
Retail TouchPoints cited a report from Software Advice that found that out of 700 surveyed retailers 91% have or are in the process of setting up a BNPL offering for customers. They’re not just using it for luxury items. The top three categories for BNPL use in e-commerce, as reported by Adobe, are apparel, electronics, and grocery.
BNPL’s tremendous growth is largely driven by its adoption by younger consumers. Over 60% of consumers under 44 made use of the service by March 2021, and for the 18-24 age range, adoption jumped from 37.71% in 2020 to 61.16% in 2021, according to an Ascent’s survey.
It is not surprising that the age group that likely includes college students would embrace a form of payment that offers the convenience of a credit card without the cost of interest payments so long as the regular installments are made. The same demographic is very likely to use an Apple phone for payments, which is why it makes perfect sense for Apple to move into this space now.
What Lies Ahead
I have no doubt we will hear announcements of similar offerings from rival companies in the future. Given the huge upward trajectory that it has already demonstrated, the BNPL bandwagon is one that customers, retailers, and loan providers are eager to jump on.