Adopt Now, Not Later: Accelerate Issuer Growth with Buy Now, Pay Later Strategies
What are the numbers?
As “buy now, pay later” purchase strategies go mainstream, issuers need to lean in and fill the gaps with their own lending experiences or potentially face a steady erosion of transaction volume and, potentially, customers.
Buy now, pay later (BNPL) solutions have surged in recent years, presenting a real threat to the interest and fee income issuers have enjoyed for decades. In fact, transaction volume for BNPL soared to $39 billion in 2020, from $3 billion in 2019, and is expected to reach $55 billion this year and $114 billion by 20241. That’s a two-year compound annual growth rate of 328%!
While it’s still just a drop in the bucket when compared to Visa and Mastercard transaction volumes of approximately $5.7 trillion in 20192, BNPL is an important and fast-growing commerce experience that consumers really like. For starters, they gain instant credit approval with no hard inquiry on their credit report, and they also get predictability of payments and the convenience of paying for items through super apps.
A “white hot” space
When the pandemic presented a perfect storm of a massive shift to online shopping, a contraction in credit availability and a perception that general purpose credit usage is being not fiscally smart, established fintechs such as Afterpay, Klarna, and Affirm, swooped in to fill the void. So did upstarts such as Zippay, Sezzle, Splitit, Latitude Financial Services, Humm, and Openpay. And BNPL as a payment medium took off.
The “white-hot” growth in BNPL has prompted established players to set up their own solutions or make acquisitions. Visa, Mastercard, and PayPal released their own products. Alliance Data purchased Bread. Affirm went public, while Square announced a deal in August to buy Afterpay for $29 billion.
For financial institutions that haven’t yet offered a BNPL service, it’s time to act. BNPL options are changing the way individuals pay for goods and services. It’s as much of a budgeting tool as it is a convenient way to pay for emergency purchases, and it’s siphoning off potential volume and customers from credit card lenders. Fintechs overall are helping divert about $8 billion to $10 billion a year away in volume from banks3.
What are the opportunities for issuers?
To preserve their existing customers—and find new ones—issuers need a sound strategy for targeting both, while making sure they comply with regulators in the process.
There is plenty of potential to tap into an issuer’s own customer base, and elsewhere.
Wisdom through the ages
Installment loans are popular among Generation Z and Millennial shoppers. These demographic groups have shown themselves to be less trusting of credit card companies than their elder generations and like the appeal of certainty.
We see it in the data. In one snapshot, since March 2021, millennials have exceeded their generational counterparts in terms of average transaction volume using BNPL offerings, according to an analysis of issuer data by TSYS.
But what gets missed is that most older consumers are open to new products. Baby boomers and Gen Xers offer an extraordinary opportunity to spread out BNPL strategies.
In 2019, for example, an issuer launched the ability to split purchases into installments in its mobile app. This financial institution is a Visa and Mastercard issuer with access to several million merchants. In short order, it was able to offer the option to pay by installment for their customers at the point of sale, or later, after a transaction has been made. Since implementing these solutions, Gen X customer usage now only slightly trails that of millennials, and the volume from baby boomers is not far behind.
Segmenting through values
What is driving this action by issuers? Many see BNPL strategies as an excellent way to grow commerce enablement across multiple segments. Take the budget-minded consumer for example. Spreading out payments while still allowing the cushion of a monthly balance is ideal for those concerned with cash flow. Adoption is also taking place with installments as a budgeting tool for emergency and large ticket items. Many consumers prefer flex payment plans and issuers can set these into motion with interest, with fees or with no interest or fees at all.
What about the younger consumers and especially those so concerned with credit that tend to be exclusively debit purchasers? For those that shy away from credit, extending installment offers into harder-to-reach debit spending segments makes a lot of sense. Finally, there’s a whole new generation that’s grown up with subscription plans and prefer to use the ‘pay as you go’ model.
How can issuers adopt a winning BNPL strategy?
Issuers can turn to their experienced processing partner to help them develop a feature-rich BNPL experience for their customers. Analyze the data for opportunities, understand who you are trying to target and develop a rapid launch plan. A comprehensive plan should encompass the following:
- Perform an analytical review of your portfolio — Work with your processing partner to establish a business case, inclusive of customer segmentation. You can then see projected profits generated by segment and modify fees to generate the return you seek.
- Tap into existing cardholders — Work as quickly as possible to enable post-purchase opportunities now in native mobile apps, as demand exists as shown in the above graphs. Start by using the credit already extended to non-revolving cardholders, by offering a selection of large value purchases that the cardholder could turn into BNPL.
- Capture new customers instantly — Generate new revenue streams from new users. Embed a cardholder journey for new users through digital instant issuance of cards in your mobile app. As an example, create a BNPL virtual card product to help users budget and spread payments over a known schedule. The fully digital experience allows users to apply for and sign a cardholder agreement, then instantly set up their digital card in their wallet on their phone, ready to use.
- Use APIs to set up and transform faster — Your processing partner will offer a full suite of APIs as the basis for creating this new credit offering to integrate with your native mobile app and other banking channels. For example, the APIs should allow for easy integration with your customer service center for assistance with setup and product choices. APIs enable issuers to move quickly to add these consumer conveniences through their native mobile app and other banking channels.
What are the results?
One issuer developed a new installment service designed to help its credit card customers manage repayments when they purchased high-value items. Borrowers were allowed to set repayment time frames from three months to two years all through their app. The issuer found that a significant portion of those who signed up had used the plans at least twice.
This approach offers a range of benefits for customers. Large purchases are paid down quicker, which means better budgeting and financial well-being. There’s more control over payments, as users know exactly what and when they are going to pay for a specific transaction. The service also helps bridge the gap between credit card borrowing and personal loans.
Happier customers translate to better retention and better use of existing credit lines—not a bad thing considering consumers who are looking for attractive payment flexibility and convenience will likely gravitate to BNPL fintech offerings.
Who to contact?
Now is the time to consider the advantages that a broader BNPL strategy may provide.
If you haven’t yet set up a buy now, pay later capability, TSYS can set you on the path quickly. We can work with you to understand your card base, who you’re trying to target and help you execute a winning strategy. Contact us at [email protected] in North America, or at [email protected] in the UK and European Union.
- Mercator Advisory Group: "Buy Now, Pay Later: A Modern Take on Retail Financing"
- The Nilson Report, #1169, February 2020
- McKinsey & Co.: "Buy now, pay later: Five business models to compete"