Payment Declined: How Virtual Cards Could Drive BNPL Acceptance

August 2022

Fintech & Payments

Dominique Tetnowski

Research Analyst

The most common way BNPL (buy now pay later) platforms make a profit is through charging their partner merchants a percentage of the consumers purchase price, as well as a flat rate per transaction. Similar to merchant fees for the acceptance of credit and debit cards, BNPL firms will also charge merchants a fee for accepting their payment option. The merchant and BNPL vendor will agree upon an associate fee between 2% and 8% of the sale price at the POS (point of sale). These fees are typically much higher than those of credit and debit card issuers.
 
While these fees are much higher for BNPL acceptance, offering a BNPL payment option to consumers, this significantly increases the average order value by an average of 45%.
 
The Acceptance Problem
 
Despite the additional revenue that can be generated by accepting BNPL, however, it is not as widely accepted as credit cards - with many BNPL providers only being accepted at specific partner merchants. As the use of credit cards is well established, the payment method is commonly accepted in most stores, both online and in physical stores. BNPL does not yet have this luxury, as the offering is still relatively nascent, and the appropriate infrastructure is still being developed and implemented.
 
Many users also experience difficulties returning items bought using BNPL agreements; having to provide evidence that the return has been accepted before the payment agreement is cancelled. This can be a prolonged wait, due to return processing time; meaning that users may continue to be charged instalment amounts, even though they no longer have the goods.
 
Growing Importance of Virtual Cards
 
The development of virtual cards is of considerable importance for the future advancements within the BNPL market. Providing virtual cards completely removes the acceptance issue currently facing the BNPL market.
 
With the use of a virtual card, all payments are accepted like a standard credit card. Cards are not tied to a specific merchant and can be used in a range of places, exactly like a traditional bank card. This gives consumers greater control over where they use their BNPL functionalities as they are able to use them wherever card payments are accepted. The merchant still receives the full payment amount and the customer pays their balance in instalments; exactly as with digital BNPL.
 
The entire payment process is digital, with no need for a physical card, featuring a wide range of options including credit cards, vouchers and gift cards. BNPL virtual cards are most stored on a smart phone within a digital wallet. With BNPL vendors, the virtual card is linked to another card with which the consumer pays their BNPL account. With banks that offer BNPL payment options, the card is linked directly to their bank accounts. Additionally, banks and card issuers providing the payment option do not need to issue the user a new/additional card, as they have the advantage of existing infrastructure and cards in consumers’ mobile wallets.

• The number of BNPL (Buy Now Pay Later) users will surpass 900 million globally by 2027; increasing from 360 million in 2022.
• This substantial growth of 157% will be driven by the anticipated economic downturn, which will increase the demand for low-cost credit solutions.
• BNPL schemes enable consumers to spread the cost of their purchases without interest charges; making them a highly attractive alternative to credit cards. Additionally, BNPL services do not require hard credit checks and an increasing number of merchants are accepting this payment method; making it easier to access for consumers than traditional credit.
• India has potential for rapid growth in BNPL, with users predicted to grow from 25 million in 2022 to 116 million by 2027. This is due to rising eCommerce usage and growing interest in international goods available through online retailers.
• In turn, the research recommends that vendors build strategic partnerships with vendors in developing markets with established consumer bases, to successfully capitalise on this user growth and associated revenue.
• The adoption of virtual cards, where digital only cards are used for purchases, will increase the usage of BNPL solutions, as they only require merchants to accept card payments - overcoming previous limitations on growth. The advancement of virtual cards allows BNPL schemes to compete with credit cards; particularly in-store, where single use BNPL cards can be used within a digital wallet to complete contactless transactions.
• In order to compete in this highly competitive landscape, BNPL vendors must differentiate their services: including offering virtual cards, browser extensions that automatically facilitate BNPL payment services, and digital loyalty schemes.