Buy Now, Pay Later (BNPL) has experienced rapid growth in the U.K., particularly since 2018. Consumer behaviors have driven the popularity of this product and will continue to support its expansion. From 2019 to 2021, worldwide BNPL loans grew by 970%, increasing from £13.2 million to £142 million. In 2023, the global BNPL market size 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 do not leave a 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 first-gen BNPL products facilitates desired outcomes for both customers and firms. Customers benefit from increased access to high-value products, with payment typically spread over four periods (T+1, T+2, T+3, T+4). This creates a customer lock-in period for upselling opportunities for both banks and merchants, often with wafer-thin interest rates or no-cost EMI.
While many consumers still prefer credit cards, BNPL is gaining traction. Adoption rates are growing exponentially:
BNPL’s rapid growth is currently driving unsecured lending. As a strong challenger to traditional lending and credit options, BNPL is especially popular among Gen Z and millennial consumers, who are shaping the future of shopping. Its appeal lies in interest-free credit, simple approval processes, and set payment schedules, making it a preferred alternative to credit cards.
Buy-Now-Pay-Later U.K. tech pioneers are facing increased competition as banks enter the market, seeking a share of the £6.4 billion opportunity. Various BNPL models are emerging, including digital revolving credit embedded at checkout, BNPL virtual cards stored in digital wallets, and options to pay upfront with a credit card and convert later to a BNPL installment plan.
'Embedded' BNPL represents a land-grab, and banks that want to participate must act quickly.
Although many consumers still prefer credit cards, the digital convenience of BNPL checkout options is rapidly gaining adoption, enhancing customer satisfaction and loyalty. Research indicates that the primary reason customers switch to BNPL is to avoid high credit card interest, with casual wear being the most popular purchasing category.
BNPL spending is distributed across categories:
Most BNPL consumers have never missed a payment. However, in the last 12 months, 4 in 10 users have struggled to repay. The average spend per person is £396, with 41% having missed a payment. It is crucial to ensure consumers can afford purchases, necessitating stronger safeguards and clearer communication during the checkout process to ensure customers understand they are borrowing money.
Most customers who have missed a payment have not done so more than once, and only half of those who missed a payment have done so more than once, with less than half citing affordability as the reason.
There are three main focus areas of industry challenges for BNPL providers:
The underlying assumptions of BNPL must be revised, and the model evolved to ensure viability.
A typical customer shops online, adds items to their basket, and receives a targeted 0% offer for four monthly installments if they spend over £100. Pre-qualification can be based on payment methods. Basic information is prepopulated from the customer profile, and bank account data is requested to verify income. Documents are managed and checked digitally, with algorithms verifying and flagging missing data. A one-off hard check is required for digital revolving credit. Underwriting is fully automated, enabling real-time credit decisions in seconds. Customers can manage their credit digitally and reuse pre-approved limits for repeat purchases.
No additional paperwork is needed.
A coreless bank is centered around data, with APIs and cloud as its backbone. Every function is a replaceable module, including core banking systems. The architecture weaves together solutions from fintech innovators to address capability gaps and enables continuous improvement. Integration with third parties accelerates merchant onboarding, scales acquisition, and improves the partner experience.
BNPL rent-a-platform partnerships enable:
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.
*Standard Loan Book: benefit realization over 3 years
**BNPL-as-a-Service: benefit realization targeted for year 3, illustrated over 1 year
The value of BNPL-as-a-Service includes:
BNPL-as-a-Service can deliver significant revenue uplift by reaching large customer pools and enabling exponential growth.
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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