Times may be tough financially, but that does not mean consumers are skimping on necessities or sacrificing luxuries to get by. Many are leveraging a popular lending concept that facilitates short-term split payment options to finance their purchases.
The concept is known as “buy now, pay later” or BNPL. It allows consumers to stretch their money without getting saddled by compound interest, which can be especially helpful in an unforgiving economy. That’s great for consumers, but tough for financial institutions, who may be missing out on crucial relationships with borrowers that opt for available third-party BNPL financing.
In this blog post, we’ll explore BNPL more closely, discuss its growing popularity, and show how financial institutions can use it to win over borrowers.
An Alternative to Traditional Credit
While BNPL may sound like regular old credit, it works a bit differently. Instead of paying the full amount upfront, borrowers can use BNPL to split the cost into smaller, manageable payments over a finite period with a pre-defined interest amount.
Another key difference is that BNPL typically has more flexible credit requirements compared to credit cards or loans, making it more accessible to borrowers. Some BNPL providers may do a soft credit pull for approval. Others may not check at all, relying instead on other factors like income and employment status.
Who Is Using BNPL and What Are They Buying?
A study by Juniper Research indicates there were an estimated 360 million people worldwide using BNPL services in 2022, and that number is expected to reach 900 million by 2027. In CFPB’s report, younger populations tend to be more over-indexed than older generations, which means their presence in BNPL is greater than their share of the general population.
Although BNPL borrower demographic data skews younger, PYMNTS says, “More than 46% of baby boomers and seniors and 71% of BNPL users with incomes over $100,000 increased their use between 2021 and 2022.” This means BNPL appeals to a variety of ages and income levels.
Furthermore, CFPB’s report shows borrowers are not only using BNPL for extravagances. In fact, the industry mix of BNPL usage is transforming. Many are employing the borrowing strategy for everyday expenses like gas, groceries, and utilities, which accounted for more than $229 million of loan originations in 2021.
Tapping into a Billion Dollar Industry
Research points to BNPL being more than a down-market tool. It is a valuable resource that gives borrowers more buying power. CFPB’s report also indicates that BNPL is experiencing rapid growth, with the number of loans originating in the U.S. growing by 970% between 2019 and 2021. The dollar volume of those loans soared from $2 billion to $24.2 billion in the same timeframe.
Borrowers are eager for more BNPL opportunities. Seventy percent of current users expressed interest in bank-offered BNPL plans, with millennials being the most interested. Since BNPL is largely a fractured experience for borrowers in the current market of third-party providers, financial institutions are in a unique position to offer greater efficiency and convenience.
Currently, BNPL offer terms and eligibility criteria vary from vendor to vendor and by provider, which can cause confusion and limit purchasing power. Additionally, if a borrower chooses to utilize multiple third-party BNPL providers, that means more login information to remember and digital wallets to maintain. Without a centralized view of all their BNPL agreements, there is an increased risk of missed payments and possible over-extension.
With digital tools powered by SWBC’s partnership with equipifi, financial institutions can give borrowers improved access to BNPL through their debit cards and online banking apps without changing how they bank or shop. Borrowers will receive notifications from their financial institution when a transaction is eligible for BNPL, giving them access to flexible financing without having to log into a separate account. What’s more, financial institutions can tailor the parameters for offer eligibility and determine loan terms that fit within their risk profile to help ensure borrowers are using BNPL in a responsible way that aligns with their financial outlook.
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