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The prevalence of Buy Now, Pay Later (BNPL) schemes has been remarkable in recent years, capturing the attention of more than half of U.S. consumers, according to data from Bankrate.  However, despite the popularity of this type of loan, BNPL is decreasing in popularity and is only one of many point-of-sale financing options. 

In this article we explore BNPL and explain how it is only one element of the broader consumer financing market. 

What is Buy Now, Pay Later (BNPL)?

Buy Now, Pay Later (BNPL) revolutionizes the purchasing process by allowing consumers to defer the full payment for goods and services. Through this innovative payment model, shoppers can instantly finance their acquisitions, repaying the amount in fixed, interest-free installments over a predetermined time frame. For example, a purchase worth $100 could be divided into four installments of $25 each.

This financing solution has seen widespread adoption across various business sectors, especially among e-commerce retailers, for its ability to significantly uplift conversion rates, augment average order values, and broaden customer bases. At the end of 2022, retailers offering BNPL options reported up to a 30% increase in sales volume, according to an article in PYMNTS, attesting to the method’s effectiveness in enhancing sales performance while offering customers the flexibility of staggered payments.

The Rising Popularity of Buy Now, Pay Later

Buy Now, Pay Later (BNPL) services have surged in popularity, with 50 million consumers in the United States adopting this flexible payment option over the past year, according to PYMNTS research. This trend reflects a growing consumer appetite for manageable payment plans and signals a significant opportunity for merchants, as nearly 60% of consumers are aware of BNPL. Implementing BNPL options can increase sale likelihood by 20% to 30% and raise the average transaction size by up to 50%, translating into considerable revenue boosts for retailers. Additionally, a recent survey highlighted that nearly 70% of customers spend more when using BNPL services, further encouraging merchant adoption. This financial model benefits businesses by driving sales, increasing ticket sizes, and promoting financial inclusion among diverse groups, including recent immigrants, by making essential services more accessible. Despite the consistent use of BNPL among U.S. shoppers since 2021, interest in future use has grown, indicating an expanding market. The advantages for merchants are clear: offering BNPL can significantly enhance customer spending behavior and loyalty, underscoring the importance of overcoming any implementation challenges to capitalize on this lucrative trend.

How do Buy-Now-Pay-Later Services Work?

BNPL services facilitate a streamlined shopping experience, enabling loan application at checkout, available for both online and in-store purchases. The approval process from the BNPL platform is swift, leading to an immediate initiation of the repayment plan with an upfront payment at purchase. The ensuing installments are designed to be interest-free, with additional fees applied only in instances of delayed payments.

How Buy-Now-Pay-Later Services Make Money

BNPL platforms derive revenue from two primary sources: merchants and consumers. The merchant fees might include an initial setup cost and a per-transaction charge, whereas consumer fees generally entail penalties for late payments. This dual-income model supports the operational viability of BNPL services, offering interest-free installment plans to shoppers.

What Are The Benefits Of Buy-Now-Pay-Later Services?

BNPL services streamline the checkout process, offering a seamless and personalized payment experience that caters to customer preferences. These benefits extend beyond convenience, as BNPL options also improve conversion rates, and elevate average order values. 

Challenges with Providing Buy-Now-Pay-Later Options

Despite the advantages, BNPL solutions have their limitations, particularly concerning credit inclusivity and the financing of larger purchases. The existing one-size-fits-all approach of many BNPL providers fails to accommodate the diverse financial needs of all consumers, potentially leading to higher default rates and financial strain for those unable to meet repayment obligations. Further, BNPL providers face new regulations and legislations in 2024 which could challenge their existing models. 

Consumer Financing Platforms

Distinguishing themselves from BNPL services, consumer financing platforms offer more flexibility.. These platforms, by connecting with multiple lenders, are able to tailor financial solutions to individual consumer needs more effectively, making them a preferable choice for merchants and their customers. Lenders also benefit from this model which connects them to suitable borrowers at their moment of need, creating a win-win-win situation.  

BNPL vs. Consumer Finance

There are a number of fundamental differences between the Buy Now Pay Later scheme (BNPL) and traditional consumer finance which affect the choice of consumers and investment behavior. The first difference is the simplicity of BNPL because there is no interest on short-term purchases, which means that for those people who would like to make smaller payments without paying extra costs, this can be an ideal option. Consequently, due to these factors, BNPL has become very popular with less expensive items that can be easily repaid over a shorter period of time.

Unlike BNPL services, which usually charge no interest, traditional consumer finance—credit cards and personal loans usually involve interest rates and sometimes additional fees; however, it provides more freedom when choosing an amount of the loan as well as its repayment duration. So, in this case, it is more preferable for major purchases or consolidation of debt over the longer time horizon. The credit check required by the banks before granting such type of credit is a barrier for some consumers who have had earlier problems with repayment but also a benefit ensuring that they will not be burdened with further financial obligations beyond their means.

When deciding between BNPL and consumer finance, consumers’ financial health as well as their liquidity are of much concern. The zero-interest installment options provided by BNPL might be pocket-friendly when one needs to make an urgent purchase, but the possibility of higher credit limits and a longer repayment period on consumer finance acts as a safety net for bigger financial requirements or unforeseen contingencies. In order to choose between BNPL and traditional consumer finance, consumers must consider their financial standing along with fiscal stability in the long term, weigh immediacy versus flexibility, and assess growth possibilities in terms of larger credit lines.

Selecting the ideal BNPL provider necessitates an assessment of factors such as repayment terms, credit limits, and customer demographics. Providers differ in their offerings, for example:

• Affirm: provides installment plans ranging from short-term options to loans extendable up to 36 months, with varying APRs based on the purchase and customer creditworthiness.
• Afterpay: (Clearpay in the UK and EU) offers four interest-free payments, catering to users in multiple regions with its expansive user base.
• Klarna: introduces flexibility with payment plans that spread the cost over several months or allow for deferred payments, in addition to offering financing options for longer periods.

An embedded lending platform, such as ChargeAfter’s, ensuring a broad range of consumer finance options beyond BNPL, including revolving credit, short and long-term loans, private label credit cards, lease-to-own, and B2b options, catering to diverse consumer needs and enhancing approval rates.

Selecting the Right POS Financing  Solution

In choosing a POS financing solution , merchants should consider factors such as repayment terms, credit limits, and geographical reach to ensure alignment with their product offerings and customer demographics. Platforms like ChargeAfter simplify this selection process by providing access to a multi-lender network that offer competitive terms, enabling merchants to seamlessly add or remove lenders from their points of sale, and deliver a multi-lender waterfall financing experience that boosts approval rates to up to 85%. 

Integration and Support Across Platforms

ChargeAfter enables easy integration of financing options at omnichannel points of sale, ensuring merchants can offer diverse financing solutions effortlessly. The platform also provides robust post-sale management tools, facilitating efficient transaction oversight and customer service and actionable insights to optimize the lending offer and convert more sales.

For businesses aiming to maintain brand consistency, the platform offers white-label financing solutions that allow merchants to customize the financing experience to align with their brand identity, enhancing customer recognition and trust.

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In consumer finance, the methods we use to pay for goods and services are significantly transforming. Innovative financing solutions challenge traditional payment methods like cash and credit cards, reshaping consumer spending habits and preferences. This shift not only influences how consumers choose to pay for goods and services but also offers new opportunities for merchants to enhance their sales strategies. Let’s explore the evolving trends in cash, credit card use, and the burgeoning field of point-of-sale (POS) financing.

Cash: The Decline of Transactions

The journey towards a cashless society has accelerated, driven by the advent of mobile and digital wallets. Despite the United States trailing behind countries like the United Kingdom, Norway, China, and Canada regarding digital payment adoption, a notable decline in cash usage is evident. Federal Reserve data highlights that cash accounts for only 20% of transactions in the U.S., predominantly for small purchases with an average value of $22. The trend away from cash is becoming more pronounced. Pew Research Center noted a significant increase in Americans who report not using cash for purchases in a typical week, jumping from 24% in 2015 to 41% in 2023.

Credit Cards: A Waning Popularity

Credit cards, once the cornerstone of unsecured borrowing in the U.S., are witnessing a dip in popularity, especially among younger generations. GlobalData’s 2023 research revealed decreased credit card ownership among Americans under 35. This shift is partly attributed to the stringent borrowing conditions, exemplified by a 20% loan rejection rate reported by the Federal Reserve in July 2023, following multiple interest rate hikes. The search for alternatives is driven by the high average credit card APR, which stands at nearly 25%, pushing consumers to seek more favorable financing options.

POS Financing: The Emergence

The development of POS financing technology has introduced many financing products into the market, revolutionizing consumer financing at checkout. This sector, predominantly spearheaded by fintech innovations, offers a range of loans, including 0% APR, diverse installment plans, and B2B financing solutions. ChargeAfter’s data underscores a significant uptick in consumer spending through financing, with a 53% increase in the first quarter of 2023 compared to the previous year. The allure of POS financing lies in its ability to provide immediate, flexible financing options, often with more favorable terms than traditional credit cards.

Consumer Financing: the Future Landscape

Consumer financing is veering towards POS solutions as younger consumers move away from credit cards. The evolving financial technology landscape heralds a future where consumer financing is increasingly integrated into the shopping experience, offering seamless and versatile financial solutions.

While cash offers simplicity and debt-free transactions, it is overshadowed by the convenience and benefits of digital payments. Despite their flexibility, credit cards are becoming less favorable due to the potential for high-interest debt. In contrast, POS financing platforms that support a multitude of lenders and integrate seamlessly into omnichannel retail environments are rapidly gaining traction among merchants eager to offer their customers a breadth of financing options.

In conclusion, the dynamics of consumer payments are shifting dramatically, with POS financing emerging as a critical player in the retail sector. As technology continues to evolve, the potential for innovative consumer financing solutions promises to reshape the financial landscape, offering consumers more control over their spending while providing merchants with powerful tools to boost sales and customer satisfaction.

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As shoppers increasingly lean towards flexible point-of-sale financing to pay for purchases and services, and merchants and other sellers seek the best way to meet this demand, the banking sector recognizes that it needs to expand its existing lending models and diversify POS financing offerings. This shift highlights that embedded lending is not just an emerging opportunity but a strategic necessity for banks to maintain their competitive edge.

The rise of embedded lending in point-of-sale finance 

Consumer financing at the point of need is becoming an integral part of the customer journey, impacting the customer experience, business growth, and sales revenue. Continued economic challenges, such as the cost-of-living increase, alongside the emergence of on-demand loans at the point of sale to meet this need  are changing how people pay for goods and services. In 2021, nearly 5% of U.S. financial transactions, totaling $2.6 trillion, were integrated into e-commerce and other software platforms, and this is set to reach over $7 trillion by 2026, according to Bain & Company. 

Fintech companies have led the way in the point-of-sale (POS) financing revolution, especially with the emergence of Buy Now Pay Later (BNPL) loans. McKinsey & Company estimates that banks have experienced annual losses of $8 to $10 billion to fintech players, representing not only a financial setback but also a loss of a vital customer base – younger, tech-savvy consumers. 

For banks, point-of-sale financing represents both a challenge and an opportunity. While this market has been dominated by fintechs, traditional banks and financial institutions are beginning to enter this market, and they do so with significant advantages. 

Strategic advantage for banks in POS financing

Banks and traditional lending financial institutions enjoy advantages over newer fintech companies when it comes to point-of-sale financing. These advantages stem from their established infrastructure and years of experience as lenders, positioning them to become the leading provider of POS financing services for merchants and their customers. These four advantages distinguish banks from the newer fintech companies that have more recently entered the market. 

1. Established customer base and trust

Merchants seek reliable point-of-sale finance partners. Banks are known not only for their stability and balance sheets, but also their competitive rates, and secure data handling, making them ideal partners vs. a fintech that is reliant on external investors to float loans. It’s not only merchants that seek a trusted partner, but consumer trust in banks is stronger than ever, with many customers preferring bank loans over fintech options due to their established reputation and reliability. Pattamatta & Dabadghao (2022), highlight the significance of this trust, particularly for newer consumer financing options like point-of-sale financing where customers often gravitate towards the familiarity and dependability of big established banks. This is not just a matter of comfort; it reflects a deeper understanding that banks offer a level of security and regulatory compliance that newer fintech companies may not have achieved yet.

2. Regulatory compliance and expertise

The role of strict regulatory frameworks in shaping the banking sector cannot be overstated. Over the years, banks have not only adapted to these regulations but have also developed robust processes for compliance, and the banks are the leaders in regulatory and compliance regulations to protect their customers. This deep-rooted regulatory expertise provides banks with a critical edge, particularly in a financial landscape where new regulations, especially concerning fintech and innovative financing models like BNPL (Buy Now Pay Later), are rapidly evolving and are still unclear. Banks on the other hand are highly regulated and their core business is lending under strict regulatory guidance. Banks are better prepared for mass consumer finance growth.

The point-of-sale finance sector, which has grown significantly in popularity and scale, has inevitably drawn the attention of regulatory bodies, including the Consumer Financial Protection Bureau (CFPB). The CFPB’s move towards establishing industry-wide regulations is a response to the growing need for consumer protection in this sector. Banks, with their long history of adapting to regulatory changes and ensuring compliance, are uniquely positioned to navigate these new standards and in large are already compliant as lenders unlike fintech BNPL providers whose expertise in regulatory compliance is a significant advantage over their fintech counterparts, many of which are still in the early stages of grappling with complex financial regulations.

3. Risk management and credit expertise

Banks’ proficiency in risk management and credit assessment plays a pivotal role in their ability to effectively navigate the point-of-sale finance landscape. Their established frameworks for risk management are the result of years of experience and refinement and enable them to adeptly handle the unique credit risks associated with these financing models. Jakšič & Marinč (2018) underscore the importance of this expertise, noting that unlike many fintech companies that are relatively new to the scene, banks have a long history of assessing and managing credit risk. This expertise is not limited to evaluating the creditworthiness of borrowers; it extends to developing sophisticated models that can predict repayment behaviors, detect fraud, and anticipate market changes that could impact the risk profile of their lending portfolios.

4. Stronger financial backing

The recent economic climate, characterized by inflation and rising interest rates, presents a challenging landscape for lenders. In this environment, some POS finance providers, often limited by their financial resources, have found it increasingly difficult to sustain operations. They face the dual challenge of adapting to market pressures while also trying to maintain competitive rates and services. In some cases, these challenges have led to the adoption of complex and costly measures to stay afloat, impacting both their stability and the quality of services offered to customers.

Banks, in contrast, have a more robust foundation to draw upon. Their financial backing typically encompasses a diverse range of assets and substantial capital reserves. This allows them to absorb market shocks and economic downturns more effectively than their fintech counterparts. In practical terms, this stability means that banks can continue to offer competitive rates and reliable financial products even in times of economic stress.

Banks as pioneers in point-of-sale financing

In 2024, banks have a golden opportunity to emerge as leaders in the POS financing marketplace. By leveraging their established trust, regulatory expertise, risk management and credit expertise, and strong financial backing, they are well-positioned to offer innovative and reliable financing solutions to merchants and their customers. 

Understanding and adapting to market changes allows banks not only to reclaim lost ground from fintechs but also to forge new paths in consumer financing. It is evident that embedded lending at the point of sale is not a fleeting trend – it’s a key aspect of the future of banking. With a comprehensive approach and strategic advantages, banks are poised to redefine the point-of-sale financing landscape, offering enhanced services that meet the evolving needs of consumers and merchants alike.

Jeffrey Tower
EVP Global Business Development
Jeff has over 20 years of experience driving revenue through building global brand awareness, business development, marketing, and sales departments focused on consumer financing, fintech, and eCommerce.