By Nandan Sheth, CEO, Splitit
Buy now pay later (BNPL) has remained a hot topic of conversation for a good reason. Consumers love interest-free installments and merchants like the increase in sales. BNPL accounted for 2.1% of global e-commerce sales in 2021. With over 50% of consumers saying they plan on using a BNPL service this year, there are no signs of slowing down. Yet, many businesses are now starting to feel the greater implications on their business and bottom line.
I have had many conversations with mid-market and enterprise merchants across the globe over the last couple of years. While the impact of BNPL has been generally positive, a few key issues have come to light that hamper the effectiveness of BNPL. If we can improve these three key areas, we can improve the experience while creating a more responsible option for consumers.
Removing the added friction at checkout
The high friction inherent in legacy BNPL delivers sub-optimal performance for both the consumer and the merchant. The friction is clear at three critical parts of the checkout process: payment choice, application or registration, and purchase approval. However, much of this friction can either be removed or significantly reduced.
The first friction consumers will face is navigating the growing myriad of payment options at checkout, from choosing between debit or credit card, a digital wallet or choosing between BNPL providers. Too many options create a choice overload that has negative consequences on sales. Studies have shown people become paralyzed by the possibilities and avoid choosing one altogether or deal with regrets once they’ve made a choice.
The next key point of friction is the lengthy application process. An application can create up to seven extra steps at checkout that can take the consumer away from the merchant’s website, collate personal details, or even submit customers to a credit check to see if they’re approved.
Improve the conversion funnel to optimize performance
One of the core benefits of BNPL is increasing checkout conversion rates – and it does. BNPL can increase conversion rates 20-30% and lift average ticket sales 30-50%. Yet, there are ways we can improve the BNPL conversion funnel.
The biggest area for improvement is in the approval process. Legacy BNPL providers have mediocre approval rates at best. The industry average for approval rates is around 40-50% and as low as 30% depending on the vertical and demographic. Nothing is more disheartening to the shopper than being declined at checkout. The negative impact can not only lead to a lost sale but can damage the shopper’s relationship with the merchant.
Improving approval rates will lead to a better customer experience and enhance the efficacy of BNPL. Several technological advancements are helping in this area. Artificial intelligence (AI) is one example which looks at several factors to make a better lending decision. AI decisioning engines can make faster, less risky approval decisions.
Another option is to unlock existing and approved credit lines. Consumers tend to shy away from using credit cards because of high interest rates. But at the same time, 45% of consumers pay off their credit card balance each month. Credit cards have a unique advantage over BNPL – there is no need for an application because the credit is already issued and available at any time.
Splitit is making it easier to unlock the credit the consumer already has on their current cards. Splitit breaks up larger purchases into smaller, interest-free monthly installment payments. This solution combats the declining conversion funnel, removes the tedious registration process giving customers a clear, simple way to pay over time.
Close the chasm between consumers, merchants and the payments ecosystem
BNPL has unintentionally created a chasm between consumers and merchants as well as the rest of the payments ecosystem. Closing these chasms will go a long way in delivering a better experience for the entire payments ecosystem.
Merchants are starting to feel disenfranchised from their customers by legacy BNPL and rightly so. Businesses focus significant expenses and resources to attract and turn prospects into customers. With BNPL, consumers are now working with an entirely different brand at the most critical part of the checkout process where consumers value trust and security the most.
When consumers use a legacy BNPL service or download their app, they receive emails, alerts and notifications from the BNPL service letting them know of upcoming deals and events and encouraging them to visit the app. For the consumer, it makes sense to follow the lead for the best deal. But for the original business, it can lead to a lost sale and a lost customer.
Merchants should look for a partner that can incorporate BNPL as seamlessly as possible in their existing checkout flow, ideally with a merchant-branded experience to help alleviate brand confusion and provide a more elegant experience for the consumer. They should seek a solution without a lengthy application process and with high approval rates for their target customer, adding zero friction to the checkout.
The rapid growth of BNPL is also creating a strain on other relationships in the payments ecosystem, most notably with financial institutions, card networks, card issuers and acquirers. The shift in transactions from credit or debit to a BNPL has trickle-down impacts across the entire ecosystem.
Why does this matter? Several recent surveys show consumers prefer and trust their relationships with their financial institutions or credit cards more than with third-party services and providers. One survey notes more than half (53%) of consumers would consider a BNPL service offered by a bank extremely appealing than 35% that prefer a pure-play BNPL. Another survey shows nearly 50% would prefer to use BNPL that uses their existing credit card.
Closing the chasm and creating more symbiotic relationships in the payments ecosystem delivers a better front-end and back-end experience, especially for merchants. This can be accomplished by providing a more agile and contemporary orchestration technology layer that brings all the constituents closer rather than driving them apart.
The fact is that BNPL is here to stay. Its rapid growth is a testament to the need and desire for the service. Installment payments allow customers to pay for products or services in a way that works for them. Whilst, businesses can give their customers greater financial control, which cannot be undervalued. By working on improving these three key areas, we can create a more robust and future-proof BNPL option that benefits the entire payments ecosystem.
