Upgrading the user experience - taking the example of ‘Buy Now, Pay Later’
Retail banking continues its transition: while 2020 may have marked the ‘rock-bottom’ year for retail banking and 2021 has provided some light on the horizon, banks still need to reposition and reinvent themselves, in a growing competitive landscape which is becoming increasingly digital across all products. This article is part of the 2022 Strategy& Retail Banking Monitor series and sheds light on the urge for retail banks to reinvent products.
A reinvented product experience: Simplicity is key
Neobanks and fintechs started to pave the way to fully digital and simple banking propositions years ago. With growing user bases and a further acceleration due to the COVID-19 pandemic, a fundamental change in retail banking products is visible all over the world. The changes range from increased adoption rates for mobile and contactless payments to simple investment propositions that gained sizable client bases with high shares of first-time investors in very little time, and to lending and account offers that are enabled and fueled by open banking. To stay relevant, banks need to reinvent their product propositions in a way that empowers them to provide equally simple, convenient, and digital solutions for their customers.
Whilst consumer lending volumes are growing in some countries and stagnating in others, one specific consumer lending play is commonly one of the biggest growth areas in retail banking and fintech in general: ‘Buy Now, Pay Later’.
Buy Now Pay Later: An example of reinvention
‘Buy Now, Pay Later’ (BNPL) offers consumers the possibility to pay their shopping baskets ‘later’, either 14-30 days later with an invoice payment or split into 3, 6 or even 12+ installments. The success of BNPL is based on a simple and convenient check-out experience for the user – making paper-based forms, offline identity verification, and lengthy credit decision processes a relic of the past. Moreover, the ongoing (and, through COVID-19, even accelerated) growth of e-commerce is driving volumes up, while in addition the share of BNPL payments in e-commerce has kept growing over recent years – establishing a highly relevant market position in some countries (e.g., Sweden: 25%, Germany: 20%, Norway: 18%) [1]. Alongside e-commerce payments, more and more BNPL services are also offered for physical POS through (virtual) cards, and BNPL volumes are expected to grow further in the near future as a result. Driven by the success of its superior user experience, BNPL has also the potential to develop more towards bigger-ticket items, thereby capturing market shares from the traditional consumer loans segment.
However, BNPL draws its relevance for the industry not only from the volumes involved, but also from the high frequency: most BNPL shoppers use BNPL offerings regularly. Accordingly, BNPL providers are increasingly looking to leverage and monetize these regular touchpoints far beyond BNPL.
Ways to play
Often overlooked, BNPL is not only a play on the merchant side. On the contrary, there are several ways it can be played. Business models differ along three dimensions:
- Pricing: is the offer merchant-financed, i.e., interest-free for consumers or interest-bearing for consumers?
- Origination: is the offer integrated and marketed by merchants at the respective check-outs, or is the consumer approached by the BNPL provider itself?
- Timing: is the BNPL offer used at the moment of check-out or post-purchase?
While some players are active in several (or even all) areas shown in the business model matrix above, others are focused on very specific BNPL plays. Although BNPL is currently dominated by fintechs, banks clearly have a right to play in this field. This is further supported by a recent survey conducted in the US, where 70% of the BNPL users surveyed stated that they would be interested in BNPL plans by their banks if they were to offer this [2].
Banks have three ways to play in BNPL:
- Own solution integrated at check-out: BNPL is offered as means of payment, integrated at purchase in the merchant’s check-out, with the fee / interest either via merchant or consumer, and requiring contracts between BNPL provider and merchants (e.g., Santander’s Zinia)
- Installments linked to card/ account: Purchases made through a card/ account can be ‘converted’ to installments, often post-purchase, with interest paid by the consumer, and no contracts required between BNPL provider and merchants (e.g., N26’s post purchase installments or Monzo Flex)
- ‘Liquidity supplier’ for fintechs: Provision of funding for BNPL receivables for BNPL providers, independent of product design and customer interface (e.g., Vereinigte Volksbank Raiffeisenbank for Ratepay)
What it takes
In order to succeed, banks have to design a product proposition that can rival the fintech competition in this area. Specifically, this means:
- Superior user experience: The user experience needs to be frictionless, fully digital and with minimum add-ons to conventional check-out processes (both online and offline)
- Instant execution: The approval decision needs to be made instantly since consumers are already used to instant decisions, requiring risk scoring models which are connected to own data and/ or credit bureaus
- High acceptance rates: As merchants want to keep or even improve their own conversion rates, they demand high acceptance rates, typically with upward of 90+% requested for BNPL offerings
- Smart operating model: Operations should be set up in a way to enable the product proposition as described, plus ensuring cost-efficient processing, e.g., leveraging account-based payments (vs. card payments)
- Solid business case: Commercials need to be assessed diligently, including potential interest and inflation rate hikes and other macroeconomic effects, as well as cross-selling potential to ‘traditional’ bank products (BNPL as a customer acquisition tool)
Most of these key requirements are not only true of BNPL but of any superior and winning retail banking proposition; they are also evident, for instance, across mobile-first neobrokers, digital banking and account solutions or retirement saving plans. Banks should take this seriously and not consider digital propositions simply as niche or ‘nice to have’ products. The example of BNPL shows that BNPL providers are increasingly looking to leverage and monetize the frequent and data-driven customer interactions far beyond BNPL, by offering their own apps, shopping platforms or even fully-fledged bank accounts (e.g., Klarna for retail consumers or Block, formerly Square, together with its acquisition Afterpay for business banking).
Sources:
1 Worldpay (2022): The Global Payments Report
2 PYMTS.COM / Amount (2021): Banking On Buy Now, Pay Later: Installment Payments And FIs' Untapped Opportunity
This is the third article of our Retail Banking Monitor 2022 blogpost series. Also check out the other blogposts on Reinventing and Repositioning, Reinventing Sales, Purposeful Repositioning, Repositioning for Embedded Finance, and Performance Review.
Dominik Berner also contributed to this report.
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