Despite reports that the use of buy now pay later (BNPL) is starting to slow downNew research reveals that consumers continue to access credit at the point of purchase.
According to Barclays Bank and debt management charity StepChange, the average BNPL user was paying for 4.8 purchases in June 2022, nearly double the estimate in a similar study in February (2.6 purchases per customer). .
While this type of credit has so far been associated with low-cost retail purchases, it is becoming popular for high-cost expenses such as car repairs or vacations. Familiarity with BNPL (an estimated 17 million Britons have used such services) means that other industries now offer payment option in box
“The rise of BNPL as a preferred payment method will see more non-retail companies promote it as an option at checkout,” says Amy Gavin, principal competition strategist at fintech consultancy 11:FS.
Travel and hospitality in particular have seen adoption levels rise. National Express recently announced a partnership with Clearpay, while Booking.com and Hotels.com now offer Klarna at checkout.
This could be due in part to the effect of the pandemic on consumer priorities. Even with a bleak economic outlook, interest in travel remains strong. A study by travel technology company Amadeus found that travel was the top priority for consumer discretionary spending over the next 12 months. Some 42% of those surveyed cited foreign travel as a high priority, and another 32% expressed an interest in domestic vacations, dwarfing meals out, home improvements or big-ticket items such as a new car. Three quarters of those who participated in the survey were open to using BNPL to finance your holidays.
“The travel industry has a strong use case for BNPL and providers have quickly latched onto it to increase conversion rates and average spend per customer,” says Gavin. “Especially as the current squeeze on disposable income is likely to restrict customers’ ability to prepay for high-value travel.”
While there has recently been a surge in adoption over the last 12 months, BNPL for travel is not an entirely new phenomenon. AeroMexico uses the services of Uplift, BNPL’s specialized travel provider, at the time of payment. Customers have the option to purchase at no upfront cost and then select a payment plan for up to 12 months.
“Implementing BNPL was part of our payment evolution, to offer our customers more complete payment options,” says Daniel Reyes Vega, director of digital solutions at AeroMéxico. “When we started the talks five years ago, very few retailers or any other industry offered this product.”
Reyes Vega reports that revenue generated through Uplift has more than doubled in 2022 and customers using BNPL are 25% more likely to return. “We see Uplift not just as a payment option, but as a marketing and revenue-generating tool. We partner on campaigns and use up-funnel marketing to reach our customers more effectively,” he says. Later this year, AeroMéxico will implement a 0% APR offer and a “fly now, pay later” estimating tool through Uplift. Reyes Vega believes that this will allow sales to “grow despite the current economic situation.”
The impact of the recession on shopping habits
Even with such offers, the probability of a global recession it means that many will have to reprioritize spending. With tight budgets, sudden and invisible expenses become more financially damaging, leading consumers to access BNPL services for transactions such as home or car repairs.
“My bet is that the looming recession will lead to more reliance on BNPL among consumers in general, potentially more so for certain non-retail purchases,” says Gavin. “It’s a relatively easy option for someone to avoid going into debt to buy a pair of sneakers, but it’s not so easy to avoid financing needs like car repairs or medical care when you don’t have the money available.”
Boiler and air conditioning provider Boxt offers several credit options at checkout through the white-label payment solution Divido. Its interest-free offer, available to pay between 12 and 24 months, has doubled in popularity since it began in 2017, accounting for 40% of total business.
“This growth was driven in part by the impacts of the pandemic in terms of financial stress and changing attitudes towards BNPL and in part by our interest-free plans launched that year,” says Andy Kerr, founder and CEO of Boxt.
Unsurprisingly, Boxt anticipates that customers will need help with all aspects of their energy costs for years to come. As they explore other options to help customers with rising costs, interest-free credit will be an integral part of the offering.
“Given the energy crisis, cost-of-living pressures and generally bleak economic prospects, we expect the proportion of our customers who choose to spread payments with a flexible financing plan to grow over the next two years. It will be important to offer credit for expensive items,” says Kerr.
What does financing these transactions mean for BNPL companies? As Gavin points out, these lenders haven’t had to closely scrutinize customers, since the expense is often relatively small.
“BNPL companies typically don’t do rigorous credit checks, which means significant credit risk for companies that lend money to people who may not be able to pay it back,” he says.
But some players in the space are starting to change their processes, before more regulation is introduced in 2024.
“BNPL companies are changing the way they work from a risk perspective, as evidenced by Klarna’s recent decision to start reporting transactions to credit reference agencies. Laybuy already shares their payment details with Experian, which means transactions show up on customers’ credit files,” explains Gavin.
“This is designed to improve the accuracy of customers’ credit scores and help lenders make more informed credit supply decisions.”