Buy Now, Pay Later (BNPL) has experienced rapid growth in the U.K., particularly since 2018. Consumer behaviors have significantly influenced the popularity of this product and will continue to drive its expansion. From 2019 to 2021, worldwide BNPL loans surged by 970%, increasing from £13.2 million to £142 million. In 2023, the global BNPL market is valued at £243 billion and is projected to grow at a compound annual growth rate of 25.5%, reaching £445 billion by 2026. This presents an excellent opportunity for banks seeking long-term growth to expedite customer acquisition by exploring market entry.
First-generation BNPL products are characterized by short repayment periods (typically three or four installments), 0% interest offers, and either no credit checks or soft credit checks that leave no footprint on the credit file.
BNPL offers several advantages for merchants and providers, including expedited customer acquisition, increased checkout conversion rates, and scalable growth. Merchant adoption in the U.K. is rising, with over 20,000 merchants already offering a BNPL checkout option.
The offering is a response to multiple market forces, including customer loyalty, merchant consortiums, and low-interest competition. At the point of sale, BNPL serves as a low-cost customer acquisition channel, enhances merchant partnerships, increases customer stickiness, and enables upselling of higher-margin propositions.
The operating construct of BNPL facilitates desired outcomes for both customers and firms. Customers benefit from increased access to high-value products, while merchants enjoy a customer lock-in period that allows for upselling. BNPL typically offers wafer-thin interest rates or no-cost EMI options.
While many consumers still prefer credit cards, BNPL is gaining traction. Adoption is growing exponentially:
BNPL is currently driving the growth of unsecured lending, challenging traditional lending and credit options. It is especially popular among Gen Z and millennial consumers due to its interest-free credit, simple approval processes, and ease of set payments, making it a preferred alternative to credit cards.
The BNPL market in the U.K. is valued at £6.4 billion. Various BNPL models are emerging, including digital revolving credit embedded at checkout and BNPL virtual cards stored within digital wallets. Some models allow customers to pay upfront with a credit card and later convert the payment to a BNPL installment plan.
‘Embedded’ BNPL is becoming a land-grab, and banks wishing to participate must act quickly.
Consumers are increasingly adopting BNPL due to its convenient digital checkout options, which enhance customer experience, satisfaction, and loyalty. The primary reason customers switch to BNPL is to avoid high credit card interest, with casual wear being the most popular purchasing category.
Most BNPL consumers have never missed a payment. However, in the past 12 months, 4 in 10 users have struggled to repay. The average spend per person is £396, and 41% have missed a payment. Only half of those who missed a payment have done so more than once, and less than half of those cases were due to affordability issues.
It is crucial to ensure consumers can afford their purchases. Stronger safeguards are needed, including steps in the checkout process to ensure customers understand they are borrowing money when using BNPL.
A customer shops online, adds items to their basket, and receives a 0% offer for four monthly installments if they spend over £100. They can be pre-qualified based on payment methods. Basic information is prepopulated from the customer profile, and bank account data is requested to verify income. Documents are managed digitally, and algorithms verify and flag missing data. Underwriting is fully automated, enabling real-time credit decisions. Customers can manage their credit digitally and reuse pre-approved limits for repeat purchases.
A coreless bank is centered around data, with APIs and cloud as its backbone. Every function is a replaceable module, including core banking systems. Fintech partner ecosystems can address capability gaps and enable continuous improvement. External partner integrations can scale BNPL businesses, speed up merchant onboarding, and improve distribution partner experiences.
BNPL rent-a-platform partnerships allow providers to adapt to online and in-store touchpoints, scale merchant acquisition cost-effectively, and offer fully white-labeled business financing solutions. Merchants benefit from instant access to multiple loan programs, zero integration with e-commerce platforms, and the ability to maximize revenue by selling large-ticket items with suitable financing.
A strategic investment of £8 million to £18 million could yield an estimated total benefit of over £52 million in the first year of launch (targeted for year 3 of the plan), compared to the standard loan book model, which realizes benefits over a full three-year period.
The value of BNPL-as-a-Service includes:
Publicis Sapient can develop a BNPL solution to diversify your consumer lending portfolio and accelerate value realization.
Publicis Sapient recommends an initial 12-week engagement to develop the essential components of a digital vision, linking with a progressive technology modernization strategy and launching you into the coreless era.
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