Buy Now Pay Later (BNPL) has taken off for a new generation of consumers

Many millennials don’t have credit cards, and they fear credit card debt. That makes them elusive as customers for retail banks’ consumer credit options. Or does it?

Millennials (and other generations) have embraced buy now, pay later (BNPL) as a way to acquire what they need. They like it because it’s as convenient as shopping with a credit card in many instances, but paying in installments doesn’t feel as much like debt.

BNPL is expected to grow to US$1.2 trillion by 2024, according to AiteNovarica. Klarna, Affirm, and Afterpay are among the best-known providers. They’re not alone. At Amdocs, we counted more than 170 banks and other financial service providers offering BNPL in 2020. We’ve stopped counting because BNPL has emerged as a new opportunity for banks to reach new customer segments. Unfortunately, like many must-have options, some banks are offering BNPL as yet another undifferentiated offering.

Done right, BNPL has the potential to win customers and earn their trust for banks. Those customers then turn to their trusted BNPL provider for more banking services, like auto and home loans. The key is building a BNPL experience that puts customers first. That starts with an understanding of why customers prefer BNPL to credit cards.

Credit without debt?

People who turn to BNPL prefer to avoid feeling that they’re in debt. Transactions with a BNPL provider involve paying for purchases in a pre-determined number of installments. A consumer buys something—like a sweater or a bicycle—and pays for it over several weeks or months. BNPL providers generate revenue by charging fees to merchants. Late payments incur fees, too.

BNPL sounds like a credit card—but it’s a little less flexible because merchant participation is usually required. So why not just pay with a credit card? It’s about transparency and the perception of debt. People buy something and pay for it over the short term. There’s no interest payment. The digital experience BNPL providers offer helps people manage their spending and stay on track to paying it off. Rightly or wrongly, people who use BNPL feel in control of their spending and perceive themselves to be unlikely to get mired in excessive debt.

An effective BNPL digital experience is quite different than what you get with a credit card. With a typical credit card billing experience, you see what you spent and where. But not what you bought. That luggage you bought two months ago? It’s part of a balance that, unless you pay in full, just seems to grow. But with well-designed BNPL experiences, payments connect to specific purchases. You see that you’re starting to pay for a new sweater and that you made your final payment for your luggage.

Untapped BNPL opportunities

Many financial service providers are launching BNPL options, but as noted earlier, few stand out. Exclusive partnerships, attractive merchant benefits, and flexible installment plans are potential differentiators. These are a few additional opportunities we see in many markets:

• Merchant-independent BNPL credit cards: Here you blend the flexibility of a credit card with the installment and debt-management features of a superior BNPL experience.
• Expanded BNPL lending options: Many BNPL services are focused on discretionary e-commerce purchases, such as fashion. Banks can take advantage of their local and regional relationships to partner with merchants for BNPL options for purchases that involve local services, such as car or home repairs.
• B2B BNPL plans: The B2B market is less crowded than B2C, but it represents an attractive opportunity for banks to offer flexible lending to small businesses. Through partnerships, such plans can include products not typically included in BNPL, like larger equipment purchases or business services.

Winning BNPL with a digital-first experience

A superior digital experience is essential to differentiating any BNPL service in today’s market. You’ll want to deliver an experience that aligns with BNPL users’ debt management and avoidance preferences. The Amdocs projekt202 team has worked with several financial institutions to create BNPL experiences. Let’s consider one example.

A client’s existing BNPL solution was slowly gaining traction in a crowded market. The financial service provider wanted to accelerate growth—without heavy reliance on expensive promotions. The provider’s BNPL team asked us to help them reimagine the BNPL digital experience. We created a unique digital-first design that made it easy to track spending, increase limits, and manage payments. Outcomes included:

• 4X increase in BNPL transactions, as compared to the same period the year prior
• 40% growth in active customers
• 1.3 million app downloads in the six months following launch

The company is now one of the leaders in its market for BNPL transactions over $500. It’s also the top BNPL option for residential solar, dental care, and home improvement in its home market.

Educate your team on BNPL

Talk to the Amdocs team about your BNPL goals. We can help. Let’s start with an in-depth conversation about BNPL trends and opportunities. You’ll come away with a fresh perspective on regulatory implications, market opportunities, and the competitive landscape.