In today's world, merchants embrace multiple financing options for their customers. BNPL (Buy Now Pay Later), a short-term financing alternative, enables consumers to buy products and pay in installments with or without nominal costs. This trend is taking the global e-commerce sector by a wave, with online and even physical businesses jumping on the train. Consumers find BNPL an attractive payment solution and a favourite financing option for shopping.
In Africa, BNPL grips the market with a force that keeps growing stronger. Notably, merchants partner with banks and third-party BNPL providers to operate and sustain their BNPL service. These include fintech, PSPs (payment service providers), neobanks, etc. This innovative payment service presents numerous benefits to businesses as well as consumers. However, specific concerns and risks pointed out by regulators and other players in the system suggest that it requires bolstering.
Benefits of BNPL
Several brick-and-mortar merchants moved their businesses online through e-commerce platforms following the pandemic lockdowns. It caused shifts in customer behaviour and birthed innovations in business landscapes, such as low-interest or interest-free financing options. The adaptations propelled several merchants to seek BNPL partnerships. BNPL provides consumers and businesses which employ its services with numerous advantages. As a result, several merchants continually adopt it as a financing option in their checkout and payment system. Some of the advantages provided by BNPL for businesses include the following highlights.
High Sales and Potential Market Share
BNPL encourages customers to shop for more products due to the flexibility of the payment procedure. Consumers constantly search for purchase opportunities that offer adaptable payment options and the least possible financial commitments. BNPL allows shoppers to pay for products in their own time at zero charge/commitments. It motivates them to purchase more products at once regardless of the costs.
Upgraded Customer Experience and Customer Loyalty
The emphasis on customer experience has grown in the last few years and has become an essential part of businesses, especially digitally-domiciled ones. The multiple checkout options and digital interface offered by BNPL contribute to the shopping experience. It captivates new customers and keeps loyal ones coming back. It also gives a competitive advantage to merchants that offer a BNPL payment structure. The combination of good customer experience and a quick, intuitive, and comfortable checkout experience compels customers to return, increasing customer lifetime value easily.
Increased Average Order Value
Average Order Value (AOV) describes the average payment made by a customer at the purchase point. E-commerce businesses report up to a 130% increase in AOV after integrating BNPL into their system. Flexible payments increase purchasing power and encourage customers to shop more and make higher-value purchases. In Africa, for instance, consumers leverage BNPL mostly to shop for products like gadgets, jewellery, and other high-value products. This is because the BNPL financing system allows them to spread out the cost without interest or upfront payments. In turn, it increases the average checkout value recorded by merchants/businesses.
Boosted Cash Flow for Businesses
Compared to traditional payment options, BNPL assures every party involved of a win. BNPL providers pay merchants in full immediately; hence, businesses avoid bad debts. This enables merchants to maintain better cash flow for their business activities. More so, defaults on repayment by customers do not affect business revenue. The business is also protected when a consumer returns a product after purchase. BNPL providers also place a fixed transaction fee charge on consumers and receive a percentage of the sales from merchants.
Higher Checkout Conversion Rate
E-commerce stores enable customers to view and pile up products they desire. However, the likelihood of conversion from basket to complete sale/purchase depends largely on affordability and flexible repayment. BNPL offers both and improves the number of complete purchases because consumers are unlikely to abandon their cart at checkout. Merchants who offer BNPL payment allow them to get what they need, shop large baskets, and pay comfortably in installments.
Challenges of BNPL
Despite its numerous benefits, BNPL raises certain concerns and poses some challenges to merchants, consumers, providers and partners. The major challenges faced by businesses that utilize BNPL services comprise merchant fees, consumer debts, and protection concerns.
High Merchant Fees and Default Risk
BNPL providers charge merchants and consumers, incurring transaction fees as high as 6% of the purchase amount. Although BNPL provides merchants with an avenue to give their customers the best shopping and checkout experience, it can be expensive. High merchant costs increase the risk of merchant default for BNPL providers and partners. For instance, businesses owing partners' funds might close down due to poor sales, dwindling revenues, and surging fixed and variable costs.
The goals include offering multiple financing options to consumers. However, each payment method needs to be completely integrated into the general checkout process flow of the e-commerce site or store. Integrating the BNPL system requires expensive specialized tools and technology, consumes time, and expends other resources. Expectedly, it also requires merchants to sign commercial agreements with each BNPL provider incorporated into the checkout system.
Consumer Debt and Protection
One of the biggest concerns of the BNPL financing system recently involves consumer protection. Certain individuals and organizations believe that BNPL encourages people to purchase products they cannot primarily afford. Hence, these groups demand stricter consumer protection regulations for BNPL schemes to reduce the risk of accruing bad consumer debts. More so, businesses that employ BNPL services cannot assess credit risk associated with individual shoppers. This presents the danger of accumulated unaffordable debts that affect customers, BNPL providers/partners and merchants.
Role of Alternative Data in Mitigating BNPL Risks
The biggest challenge posed by BNPL services is debt, either in the form of consumer debt or merchant default. The core of the BNPL payment system dwells on the ability to assess consumer risk profiles with limited information provided. In addition to consumer protection concerns, data privacy also stands as an important subject of emphasis. Hence, e-commerce sites possess restricted access to consumer data with which they can profile credit risk, especially for new customers. However, alternative data presents a solution to this drawback.
Alternative data makes it possible for BNPL businesses to build accurate data models from alternative sources such as e-commerce platforms. Data privacy concerns make platforms hesitant to share consumer data; however, combining alternative data with confidential computing offers a way out.
This allows data sharing for analysis between multiple trusted parties without revealing the actual data. Yet, the raw data is processed and analyzed to provide BNPL players with significant insights. This includes answers to questions such as how long a customer has been shopping on an e-commerce platform, how much time a customer spends on e-commerce platforms, AOV, etc.
Additionally, raw transaction data remains protected and not accessed, thereby, protecting consumer privacy. It simply involves leveraging alternative data to provide collective intelligence from hidden data.
The benefits of BNPL prove it to be a capable and effective tool for online businesses and e-commerce platforms. However, it bears its own challenges and risks. Hence, it is expedient to find the best package that maximizes the merits of BNPL for your business and mitigates the risks. The use of alternative data provisionally renders an escape route for BNPL players to lower debt risks if expertly employed. Moreover, alternative data, combined with the right technology, can alleviate regulatory concerns and capitalize on the efficacy of BNPL payment options.
Oystr is the largest data infrastructure in Africa. BNPL companies are partnering with us to mitigate risk and serve customers better. Start today, visit our website.