How BNPL Is Changing eCommerce

July 2021

Fintech & Payments

Nick Maynard

VP of Research

Digital BNPL is aimed at capturing the same benefits as offline repayment schemes; greater transparency and flexibility in payments for customers, without the financial restrictions imposed by credit cards or personal loans.

However, unlike in the past, customer uptake is significantly higher when compared to acquiring a credit or a store card, which have typically been limited as solutions. Furthermore, merchants as providers are much more active in participating in digital BNPL ecosystem solutions too. This is thanks to digital BNPL’s unique value proposition, which potentially yields greater benefits for both customers and merchants.

Digital BNPL creates a hybrid financial ecosystem by linking online and offline merchants (ie through in-store QR code payment options), credit card providers, and social eCommerce platforms, such as Instagram and TikTok for in-app purchases through targeted promotions. Instead of being a sole intermediary, it proactively shapes eCommerce retail trends and directly responds to the needs of both merchants and customers.
By emphasising monetisation without over-charging merchants and offering low-interest or interest-free credit to customers, digital BNPL vendors have positioned themselves as a viable alternative to credit cards. Digital BNPL providers pay attention to addressing each actor’s specific needs in the ecosystem. In doing so, these providers move into the gap generated by credit cards through converting a transactional relationship dynamic into a co-creative growth one, referred to as a virtuous cycle.

There are several benefits digital BNPL offers to both customers and merchants. For customers, digital BNPL is easy to use, as they can either shop and pay in-app, or through a merchant’s app or website to complete their purchases. Furthermore, the possibility to spread the cost over time is more than a simple psychological phenomenon; many customers actively opt to use BNPL as a budget-management tool; crediting transparency and real-time monitoring of spending. Indeed, budget management resonates with the biggest customer segment of digital BNPL, millennials. Another incentive is the easy return and refund policy: refunds and returns constitute an important pain point in all customer journeys, which only exacerbated with the rise of online shopping. When using digital BNPL, customers have the option to return their purchase without having to commit to pay the full cost upfront. Customers are also assisted in refund processes wherever disputes with merchants arise on purchases made via digital BNPL. 

For merchants, BNPL helps vendors with customer acquisition and competitiveness: digital BNPL serves as a marketing service to acquire more customers. Given the presence and marketing strategies of these providers, coupled with their accessibility to multitudes of users and convenience around use, merchants gain increasing visibility, which then translates into more customer traffic into business. Furthermore, many BNPL vendors claim a high level of ROI (return on investment) as they can increase the AOV (average order value), which makes the business case for deploying solutions very simple to justify. Customers are also less likely to abandon their carts when presented a frictionless experience at the checkout. Therefore, for merchants, investing in digital BNPL may be likened to investing in a CRM system with extensive benefits.

Ultimately, digital BNPL will sustain its growth trend by diversifying and adding on its customer base over time. While the model’s uptake is cross-generational, it is increasingly appealing to younger millennials and Gen Z, a group who could potentially struggle to obtain credit cards due to thin credit files. 
Challenges for the sector are beckoning however. The digital BNPL industry is currently largely a self-regulating one. Fears around the potential growth of unsecured lending and debt spirals, which were at the centre in the 2008’s Financial Crisis, repeating itself are causing concerns. Regulations, such as those being pursued by the UK FCA, are likely to have an impact on the market, although it is unlikely that these changes will make the model unviable, rather they will set it up on a more sustainable footing.