Upstart Shares Crash After a Big Preliminary Miss, JMP Cuts to Market Perform 8 July 2022
The Global Digital Payment Market is expected to reach USD$ 12.55 Trillion by 2027, grow with a CAGR of 10.9% ( some report state reach USD 15.27 trillion by 2027, grow with a CAGR of 12.38% ) . For years, the market has been haunting for a payment solution that delivers a better customer experience.
by 2025, BNPL will account for more than 12% of total ecommerce. The Kaleido study suggests that BNPL spend via mobile will grow at more than 16% CAGR until 2025
Measures to Stop the Debt Trap
At Australia’s Afterpay, customers are barred from using its services after they miss a payment. According to the company, 95% of its transactions globally are paid back on time, and late fees contribute less than 14% of its total income
Another crucial aspect of the performance of any lending entity is its delinquency/default rate. Here’s an analysis of the default rates of some of the larger BNPL providers across regions: These numbers resemble credit card delinquency rates—hovering between 1.5% and 2.4% over the past one year
BNPL credit given to users is not free. BNPL comes with a catch —late payment fees and monthly account -keeping fees, among other charges, add up quite quickly
What makes BNPL so popular is the coming together of cell phones and innovative business models that leverage new technologies. This mode of seamless payments provides convenience, especially while buying retail goods as unwanted goods can be returned. For retailers, BNPL has brought in repeat customers who transact with large ticket sizes
Afterpay’s CEO Nick Molnar said, “BNPL has helped retailers increase conversion rate at checkout, and in many cases, it has increased as much as 30%.” Owing to the additional benefits provided by BNPL providers, many retailers have readily embraced BNPL solutions.
Merchants can provide this service only when consumers have wallet - friendly payment methods. BNPL's USP is slicing payments into affordable chunks that can be repaid over a specified time frame, and this provides the illusion of affordability. The need for immediate gratification outweighs the financial commitment and poses certain challenges to the payment mechanism
Given the fact that emerging markets have the highest growth rate in smartphone adoption, it can be concluded that APAC and East Asian markets are crucial to the growth of BNPL in the next few years
Increasing BNPL usage, however, is resulting in greater default rates. A lot of this has to do with the behavioral patterns of its users. The Australian Securities & Investments Commission (ASIC) highlighted the danger of BNPL services in a report stating that one in five customers missed payments during 2018–2019. Of these customers, 67% were under the age of 35. With 20% of Australians now having at least one BNPL account, these platforms have become Australia’s fourth highest cause of debt. In FY2018–19
The US is also witnessing similar trends. Nearly 40% of US consumers who used BNPL services have missed more than one payment, and 72% of those saw their credit score decline, as per a study by Credit Karma . Even as BNPL debt is rising, credit card defaults are on the decline. I
BNPL: What it Takes to Balance Value Addition with
Monetization
According to
the Global Payments Report by Worldpay from FIS- BNPL is emerging as the
fastest-growing ecommerce online payment method in India, estimated to capture
9% of the total ecommerce market share by 2024. BNPL is a Point-of-Sale Micro
loan that can be paid later in interest-free installments. Over the last year
and a half, the BNPL proposition captured a lot of customer attention- thanks
to the appealing combination of interest-free credit, zero-documentation and a
seamless integration with a straightforward check-out process.
The dynamic
retail payment industry has pushed Bank/ ecommerce players to abandon the
transactional nature of approaches in order to migrate to a more “sticky” approach.
Financial institutions are moving towards an ecosystem-based thinking as
opposed to a product-driven thinking in order to become the primary engagement
point for the end customer.
The system is
unforgiving if businesses do not adapt, for instance, 55% of shoppers abandon a
purchase if they have to re-enter their credit card or shipping information.
46% of shoppers abandon it because the discount code does not work. The power
of technology-led context and connections has profoundly reinvented the
customer experience ecosystem while offering the opportunity to monetize across
the value chain.
Extending
BNPL to the lens of an ecosystem
In the current market, a comprehensive BNPL process should consider multiple user journeys, stride across varied system modules spanning across multiple stakeholders. The balancing act between the experience paradigm and the monetization opportunity is necessary to optimize the BNPL proposition. By integrating the three core elements of consumer financing, merchant financing and merchant servicing, the BNPL ecosystem can be utilized to its maximum potential.
● Consumer Financing
For consumer
financing– organizations can focus on elevating the experience
by offering multiple payment options in real-time while extending self-help
options for changing the repayment plan, mode or tenure during the loan
life-cycle. Ensuring transparency of information of return / sale cancellation
/ reversal transactions while facilitating interest rate checks and online
simulation of repayment plans definitely adds value. The insights gleaned from
the customers’ purchase patterns can enable the banks to identify
cross-selling opportunities while focusing on customer retention, thus
increasing the customer lifetime value for the bank
● Merchant
Servicing
Lenders/
Banks can add value to the critical merchant servicing process by providing a
consolidated single view of merchant obligations, ensuring automated payouts on
a periodic basis and offering comprehensive self-help options for real time
enquiries and updates. They can also look at creating new revenue channels
through cross selling banking services such as transaction accounts, cash
management, payment services etc. and charging the e-commerce platform a fee
for offering merchant services..
● Merchant
Financing
Enabling
seamless conversion of outstanding invoices into merchant credit for better
working capital management can prove to be instrumental in elevating the
experience, along with eliminating procedural delays in availing credit by
avoiding repeated credit evaluation. Additionally, banks can also look to shift
the risk of collections and payment delays away from the merchant by automating
merchant credit and project cash flow timelines for merchants to optimize their
liquidity . Thus, resulting in multiple financing opportunities from a captive
set of merchants for the bank along with better margin realization through
synergies from financing the entire supply chain.
By virtue of
their ability to have comprehensive visibility (and be a partner) on the entire
transaction lifecycle, banks are best suited to integrate the user journeys and
deliver a seamless experience across the BNPL ecosystem. However, as with any
upcoming trend, the BNPL ecosystem too has its own set of challenges– business
margins, asset quality and rate of abandonment to name the most prominent ones.
The margins are wafer thin with bankers/lenders reporting that BNPL contributes
to as much as 5%-10% of NPAs, conservatively. Additionally, BNPL tends to be
mostly made up of discretionary spending behaviour that is characterised by a
very high product abandonment rate (on an average, 69% across).
In order to
make the BNPL process work for all the stakeholders, the role of a contemporary
technology platform is critical – to seamlessly operate across
this broader ecosystem and stitch together user journeys while driving a
regulated business process and provide the required risk-managed superior
experience. A state of-the-art platform can ensure the coming together of
experience, choices, touch points, lifecycle and insights – all
encompassed by a connected ecosystem (marketplace), take away the vagaries of
the risk factor, and allow the bank to focus on the raison d’etre of their
existence – their customers.
The business model
Before depicting how these companies make money, it’s important to understand the terminology. As explained by Business Insider, companies such as Klarna, Aftertpay, Splitit, Affirm, Zip and (many) more are BNPL providers. Companies that enable their merchant networks to offer direct providers' BNPL solutions are called facilitators, such as Mastercard, Shopify or Stripe. And the retroactive providers category involves mainly issuers that offer financing options consumers can use for all purchases made on their credit card.
Essentially, the providers partner with merchants to give consumers the option to pay for their goods in monthly interest-free instalments. Merchants pay the provider a certain percent of the purchase amount as a fee, and most of the providers pay the merchants in full and then recover the money from the customers. On the consumer side, some providers run a soft credit check to make sure the merchants’ customers are trustworthy. Others look for economic benefit and charge interest of 10 to 30% on the amount, based on the customer’s credit and the duration of repayment. However, most BNPL providers don’t charge any interest rate as long as they are no delays in paying the instalments.
As per an RBA report, the most common business model involves the provider facilitating transactions by enrolling both merchants and consumers into the agreement. In this type of ‘two-sided network’ that is mainly common for Klarna or AfterPay, consumers typically set an account via the provider’s app or website, and spending limits are often approved on a per-transaction basis. Merchants that enter into agreements with BNPL providers pay a per-transaction fee for accepting BNPL payments, which tend to be high relative to the cost of accepting debit and credit card payments.
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