Buy Now Pay Later - a Credit in Disguise?

Joris Lochy | August 18, 2021 | 7 views

BNPL (short for "Buy Now Pay Later") is a hot topic in the Credit space. The recent funding round of Klarna (one of the most known BNPL players on the market) of $639 million at a valuation of $45,6 billion makes it Europe’s most valuable startup and shows that investors predict continuing exponential growth for this service.

This anticipated growth is coming from an increased negative perception of consumers towards revolving credit lines, like credit cards. As a result consumers look for cheaper and more user-friendly and convenient alternatives. Especially the younger generation of millennials seems to be attracted by this offer, with 15 percent of them already uses BNPL today, i.e. 5 times more than older generations.

Combine this with the continuous growth in e-commerce for which this type of credit is ideally suited and you can get a feeling why such an astronomical valuation could be justified.

The result is an exploding market of Fintechs offering those promising services, like Klarna, but also Affirm, AfterPay, Cashper, Divido, ratepay, scalapay, Cofidis, LayBuy… Additionally incumbent players like PayPal and AmEx have also started attacking this market.

Although many praise this new product for its user experience and convenience and its promise to offer zero-interest rate credits to nearly anyone, many specialists are also highly skeptical about this new trend, as it can push people in unneeded debt for products they don’t even need.

But what is BNPL and where is this hype coming from? And how is it different from traditional consumer credit cards or 0% interest consumer installment loans offered already for years by car dealers, electric appliances stores or kitchen/bathroom dealers?

In fact BNPL could be considered as the modern, digital equivalent of those consumer installment loans. Its characteristics could be summarized as following:
  • A short-term financing product
  • For relatively small amounts, i.e. maximum 1-2.000 EUR as a total maximum credit amount at a specific BNPL vendor (aggregated over all purchases paid with BNPL)
  • Linked to a purchase of a specific product or service
  • Usually interest-free, i.e. instead the merchant pays a commission to the BNPL provider.
  • Very strongly integrated in the check-out process of the merchant. Till now mainly for online merchants (usually as an additional payment method offered via the webshop’s PSP), although BNPL vendors recently have started to expand also to physical payments. Usually this is done by the BNPL issuing a virtual credit card (which can be limited to a specific store) with which the purchase can be done (with the smartphone emulating a physical credit card), but it can also be done via a QR code (generated by the merchant and scanned by the customer or vice-versa).
  • An excellent user experience, giving a near real-time, frictionless and fully digital origination process of the credit, i.e. in a few seconds the BNPL credit can be opened.
  • Usually consisting of an upfront payment (typically 25% of the overall purchase amount) at the moment of purchase, followed by a predetermined (= fixed schedule) small number(typically 4) of installments at future dates (typically with intervals of 2 weeks, meaning duration of 2 x 4 = 8 weeks) to reimburse the remainder. These reimbursements are usually done automatically by linking a debit or credit card or direct debit to the BNPL provider. This method is called "Slice-it" (i.e. the payment is spread over time), but many BNPL provider also provide the "Pay Later" method, which is also ideal for online purchases, as it allows the user to usually pay 14 days after his purchase. This corresponds with the moment the customer has received the product and has decided not to return it.
  • Using a soft-credit score, which uses other info (like e.g. all details of your current and past purchases) than the traditional credit scoring systems and doesn’t affect your credit score (unless there is a late payment or a failing to pay). This leads also to higher acceptance scores (of around 90%) than traditional credits.
  • The merchant is paid right away and the BNPL provider takes over all the risks, like liabilities due to fraud, chargebacks, defaulting…

If you read those characteristics, this product seems great for all involved parties, i.e.
  • Consumers get a cheap (often "free"), user-friendly, disciplined (i.e. a fixed well-defined repayment schedule) and frictionless way of funding a purchase, which they may otherwise not have been able to afford.
  • Merchants can increase their revenues, i.e. multiple studies have showed that people buying via BNPL tend to spend more than if they would be paying with a traditional payment method (i.e. increase of AOV = Average Order Value) and abandon less their shopping carts.
  • Research has also showed that BNPL can act as a Customer Acquisition Channel as a growing number of users considers BNPL (to be available as a payment method) as a key decision criterium to choose one webshop over another. Additionally the apps of BNPL vendors become more and more marketplaces advertising all their partners.

Nonetheless BNPL is not all sunshine and rainbows. Several pitfalls can be identified, which could endanger its future growth, i.e.
  • Increased regulation: while many BNPL vendors have slipped through the cracks of severe regulatory supervision (i.e. in many countries BNPL vendors try to be exempt their product from the definition of a credit), the impressive growth of this credit product is about to change this. Regulation will fiercen, as a high percentage of consumers using BNPL already cope with financial difficulties to pay back their installments. One potential improvement could be to demand for more transparency, so that there is an aggregated view of all your pending BNPL payments at different BNPL players.
  • With more and more merchants offering this service, the product will become a commodity, meaning the advantage of being a "Customer Acquisition Channel" will disappear. One might wonder as well if it is desired that every merchant starts offering this payment method. E.g. in certain countries pizza restaurants are already offering to order your pizza and pay with BNPL. If consumers start using too much BNPL, it will become extremely difficult to keep a good financial overview and the advantages of BNPL like user-friendliness and a disciplined repayment schedule might disappear.
  • The operational and support model is not always top yet. As BNPL vendors take over all liabilities, it is unclear who is responsible for the delivery of a product. A few months ago I had myself a particular bad experience with BNPL. On a webshop I selected BNPL as a payment method, but never got any invitation to pay. The webshop didn’t want to send the item as they were not paid yet and they referred me to the BNPL vendor, who in its turn referred me back to the webshop. In the end, given the urgency for receiving the product, I said it could be cancelled, which required again a message to both parties. In the end everything got straightened out, but it was not a pleasant experience for me as a user, nor for the BNPL vendor and the webshop who both had a lot of work without any revenue.
  • A similar issue exists when deciding to return a delivered item and get reimbursed. As a consumer you will return the package to the webshop, but it’s the BNPL vendor who should cancel the BNPL arrangement. Often this requires a lot of hassle for the customer to arrange all this.
  • This shows the complexity of this model. In this kind of partnerships it is extremely important to align on responsibilities (cfr. my blog "Ecosystems - The key to success for all future financial services companies" - https://bankloch.blogspot.com/2020/11/ecosystems-key-to-success-for-all.html). Ideally as a consumer you would like to have only a relation with the webshop (given the strong embedding of BNPL in the checkout process it is difficult to make a clear distinction for users), i.e. the fact that other parties like the PSP and the BNPL provider are also involved in the flow should be hidden away for the consumer. This is far from being the case today.
  • With this product being used more and more, customers might also get a negative perception of this credit, as the zero-cost credit comes with a lot of hidden costs. First of all there are considerable fees and interests in case of missed payments (as much as 30% of the invoice amount), but additionally the BNPL vendor is still paid with a more traditional payment method, like a debit or credit card or direct debit. If there is insufficient funding on the bank accounts linked to those payment methods, customers will still pay costs for failed direct debits, expensive overdraft debt interest rates and/or credit card debt interests (which people tried to avoid in the first place).
  • Additionally BNPL tends to make the origination of a credit so easy, that there is a big risk of putting customers into financial issues for products they didn’t really need in the first place.
  • BNPL usage still negatively impacts the margin of the merchant. Even though BNPL can be considered as a means to attract additional business (revenue), the cost for the merchant is still considerably higher than other payment methods. E.g. VISA and MasterCard are typically situated around 2-3% transaction commission, while BNPL methods are typically situated between 2 and 8% (usually 4-6%).
  • Consumers tend to miss out on rewards or cashbacks earned on purchases (often offered by credit card companies). This means an additional hidden cost for the consumer.
  • BNPL Fintechs are expected to get a lot of competition of incumbent players like incumbent banks and PSPs offering those services themselves. Those players can offer a lot more integrated features (e.g. a full integration in the banking app and an immediate link to the customer’s current account) and can exploit a lot of competitive advantages compared to BNPL Fintechs, e.g. lower cost of capital from deposits, synergies with other products… Although those players have been late adopters of this technology, they are likely to take a serious cut of market share from BNPL Fintechs, once they get the offer setup. Already today, Fintechs, like Amount, have created white-label BNPL products, which can help banks to quickly setup a BNPL product.

BNPL Fintechs are already taking action to address those concerns, e.g. BNPL providers offer
  • A lot of features to improve customer’s financial literacy. Although very noble, it still seems a bit of window-dressing to please regulators and public opinion.
  • A shift to also support physical payments, as explained above.
  • The app of BNPL vendors is turned more and more into a marketplace, where specific (products of) merchants (being a customer of the BNPL vendor) are directly offered, meaning the BNPL vendor becomes the direct customer entry point instead of the webshop.
  • BNPL vendors are using more and more their collected data for offering targeted marketing, like personalized recommendations, advertisements, discounts in the form of coupons and cashbacks… This can be an interesting additional source of revenue.
  • Many BNPL vendors are starting to handle the logistics of a transaction. Obviously this allows to ask higher commissions to the merchants, but also allows to provide a better end-to-end support flow.
  • BNPL credit limits are being increased to allow for more BNPL payments for 1 customer, but also to attack merchants with more expensive product offers, like high-end luxury goods. Obviously this change is slippery slope as it can increase the risk of credit deferrals/defaults and also increase negative perception.
  • BNPL vendors are transforming more and more into Challenger banks themselves, offering also more traditional banking products.
  • The apps of BNPL vendors is extended with additional value-added features, like managing spending limits, getting insights into your spending habits, receive personalized budgeting tips, get product recommendations based on your purchase history, initiating refunds…
  • BNPL vendors are starting to increase the customer relation via loyalty programs (e.g. Vibe from Klarna)

All this seems the traditional story in Fintech. Fintechs come with very innovative ideas, but often have difficulties to make those products profitable and keep their competitive advantage on the long-term, as incumbent banks develop similar offers after a few years and the Fintechs are automatically becoming more bureaucratic, complex organizations (often forced by regulators) similar to the incumbent banks, which they tried to disrupt in the first place (cfr. my blog "Neobanks should find their niche to improve their profitability" - https://bankloch.blogspot.com/2020/12/neobanks-should-find-their-niche-to.html). Let’s see how many BNPL Fintechs are still around 5 years from now.

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Article | April 29, 2022

Digitalization is a high-priority initiative that has uplifted the banking industry by exploring new profitable areas. However, the strategies for becoming digital must rely on efforts to focus on making a bank’s administration and internal operations more efficient. Digitalization refers to a wide range of tools that can create personalized and hyper-personalized experiences for people. How Banks Have Evolved with Technology Implementation The banking industry has been consistently embracing technological advancements. Since 2020, banks globally are making heavy investments in digitalization and are focusing on efficient banking operations. With the help of digitalization, the banking and financial sectors are going through a paradigm shift and are progressively offering personal touches to their operations, services, and products. Most banks now offer digital features that allow customers to conduct basic banking activities remotely using a browser or a mobile app. This development has resulted in less traffic at bank branches and has assisted banks in optimizing costs and capital expenditures fairly. Hyper-personalization in banking is becoming increasingly important. As a result, the use of technology in banks has equally surged, mainly in operations and customer services. Hyper-personalization has become an essential part of banks and other financial services providers. With this, banks are now focusing on core customer experiences to provide unique services to their customers. Today, new-age customers need hyper-personalization in banking. In 2020 ‘The Future of Retail Banking,’ A Deloitte report has stressed that hyper-personalization is crucial for banks and enables them to respond to customers’ basic needs. While this approach is widely accepted in the banking system, let’s understand a brief difference between hyper-personalization and personalization and which method is more enticing to customers. Personalization vs. Hyper-Personalization Personalization focuses on promoting a customer’s name, location, purchase history, buying behavior, and others. The most common example is including the first name of a customer in an email or promotion asset. The hyper-personalization approach uses a customer’s browsing habits and then reveals real-time behavioral data to determine customer needs. The entire activity builds contextualized communication and encourages more incredible conversions driven by AI and aligned data. For example, they send push notifications to customers, adding high-engagement sections on the website—chatbots. Therefore, it is evident that personalization banking will be further enhanced and become more personal with hyper-personalization. According to a study by Deloitte, banks are ready to embrace digital opportunities, which would be advantageous for over a trillion dollars. The movement will continue until 2025 and beyond. Growing Expectations from Customers Since 2020, banks worldwide have been striving to improve their customer experience and business operations. The digital transformation of the banking sector has changed consumer banking trends. This gives rise to one of the main concerns — what are the top priorities for customers regarding banking services? According to a survey by Wipro, 80% of customers expect their banks to provide upgraded services with improved products and easily accessible apps and websites. At the same time, 20% of customers hope banks have valuable services to benefit them. In addition, 5% of them expect improved communication channels for distributing products and services. On the other hand, according to a recent Salesforce survey, two-thirds of today's customers expect their banks to understand their unique needs and expectations. Moreover, up until 2021, 52% of customers found hyper-personalized offerings from their banks. Therefore, banks must extensively use customer data to anticipate customers’ banking needs. Gartner estimated that approximately 48% of customers want value-added services, making hyper-personalization engagements of strategic relevance. This was followed by personalization in banking with products and services. When it comes to using hyper-personalization in banking, Capital One, a U.S.-based company, stands out. It is one of the finest examples of digital marketing. It usually sends notifications to clients, assists them with simple tasks, sends new offers, and efficiently manages personal finances. In addition, they are currently using geolocation technology by partnering with several retailers. With this, they can reach customers and provide them with purchasing offers. The Marketers’ Complications What were the practical problems or challenges for marketers approaching their customers right away? Markets face several roadblocks to achieving the desired level of personalized customer engagement. Some of these challenges include: Profile: Marketers usually face challenges in categorizing, compiling, and saving online and offline customers’ data. Identity: Marketers must deal with the fragmentation of customers' identities and how they see them across devices and channels. Relevant Communication: Marketers often fail to reach people at scale across different channels with relevant information. Measurement: Marketers often complicate the accuracy of measuring customer behavior, buying habits, and needs. Therefore, marketers need to sort out these parameters and then proceed strategically to deliver hyper-personalized engagement to customers. Now let’s find out how to do it. Solutions Emerging technologies, mainly AI, data analysis, automation, and blockchain, give an insight into customers’ needs, behavior, and activities like transactions, money transfers, deposits, availing insurance, and other banking activities. Marketers can leverage these technologies, crack code, use hyper-personalization in strategies, and work to meet customers’ needs. There are a series of interconnected strategies following technology in banking that will enhance the use of hyper-personalization in banking in the future. It will enable customers' digital requirements according to products and services and identify intent-based customers in the banking system. Series of Interconnected Strategies Customer Segmentation Having an accurate identification of customer profiles and details determines how to proceed with hyper-personalization. First, you must build a digital identity solution that links customer data across devices and locations. After this, study and get profound customer insights with the help of a third-party customer database to obtain accurate customer information such as: Demographics Online and offline purchases Digital consumption Online interactions Cross-device information according to the usage of personal devices By identifying these parameters, marketers can effortlessly create a community for their highly engaged customers. In this way, marketers can include value-proof hyper-personalization methods to reach out to customers and fulfil their expectations in banking. Lead Generation & Nurturing For lead generation and nurturing, marketers should activate paid search, paid/owned social media, and affiliate sites using intelligent and real-time customer data. This will help understand the effectiveness of the platforms in generating potential leads and nurturing them in the best ways. A Data-Driven Path Banks using customer data can monetize it by differentiating between actionable and non-actionable customers. Even so, they can conduct data-driven optimization (DDO), a measurable approach when banks interact with their customers. This approach includes monetizing and identifying customers’ behavior patterns and optimizing their decision-making processes faster and more accurately. In addition, data-driven optimizations range in different types and sizes—for example, new features, CTAs, pricing, page flow, navigation, and templates. With the help of these, marketers can get a lot of data and use hyper-personalization strategies accordingly. A Hybrid Environment Given the current situation, banks should prioritize intelligence by implementing a security-rich hybrid cloud for their hyper-personalization in their banking processes. With this in place, banks can efficiently, inexpensively, and rapidly deliver hyper-personalized services to customers under a hybrid setup. For this, banks should have a robust data analytic infrastructure that can filter the most operational customer data. Prominent Examples of Hyper-Personalization in Banking American Express Sends Videos to Increase Engagement American Express’s business model includes hyper-personalization of its customers globally. We’re delegating much deeper hyper-personalization at a company level.” Harry Mole, Director of Marketing at American Express American Express demonstrates its commitment to hyper-personalization by creating videos for its customers. For example, it makes videos accompanying a customer's monthly credit card statements. The video helps customers explore and learn new ways of managing their credit shares. It also helps them learn about account creation for new customers, share financial tips and tricks, and introduce new rewards. These activities further help consumers maximize the benefits of their American Express account. Since using a hyper-personalization strategy, American Express has seen a threefold increase in marketing conversations and a considerable decrease in the cost of acquiring new customers. Edward Jones Uses Personalization to Increase App Downloads Edward Jones, a financial services firm, offers a mobile app that allows customers to easily access their accounts and investment options. The app effectively conveys the benefits of security and convenience and is equally friendly. Edward Jones initiated an email campaign to encourage customers to download and engage with the entire app. It added a messaging section for app users and highlighted services such as tracking investments, depositing checks, transferring funds, and more without visiting a branch. Frequently Asked Question What do customers expect from their bank? Customers need assistance and want their needs to be understood by their banks. They do not prefer a generic approach to services. They prefer a more customized and solution-driven approach. How is the hyper-personalization approach implemented in banks? Hyper-personalization in banks can be implemented in the following ways: Compile essential customer data and utilize it to create strategies Create hyper-personalized content according to the customer base Distribute the content across channels to reach customers Why is personalization important in banking? According to a study by Gartner, 67% of customers are unaware of the services and products their banks offer. So, with the help of personalization, they can easily connect to banks’ offers, benefits, and services. This is where personalization comes into play.

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Harbert Management Corporation

Harbert Management Corporation (“HMC”) is an investment management firm focusing on alternative assets, with approximately $4.6 billion in Regulatory Assets Under Management as of January 31, 2016; asset classes include: U.S. Real Estate, European Real Estate, Seniors Housing, Growth Capital, U.S. Mezzanine Debt, European Growth Capital, Independent Power, Discovery Strategy and Long/Short Equity. HMC is headquartered in Birmingham, Alabama USA and has offices in Atlanta, Dallas, Gainesville, Nashville, New York, Richmond, San Francisco, London, Madrid and Paris . HMC and its affiliates make significant co-investments on the same terms as other investors in all their sponsored funds helping ensure a sharp focus on returns and strict controls around back office, legal, compliance and reporting. Real Estate, Venture Capital, Mezzanine Debt, Independent Power, U.S. Private Equity, Public Securities, and Seniors Housing

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