What is Buy Now Pay Later (BNPL) and what are its business opportunities?

Pay later for that expensive purchase? Yes, Buy Now Pay Later (BNPL) may remind you of a credit card or the well-known store credit, but it is a growing trend in the market! This model, which is gaining more prominence in Latin America, allows consumers to make purchases and pay later, but in a more flexible, practical (and sometimes cheaper) way than traditional means such as credit.

In this article, we explain how Buy Now Pay Later works and what advantages it offers for customers, merchants, and financial service providers. And, of course, without losing sight of the risks you need to pay attention to and how to organize yourself to take advantage of this trend in your business.

What is Buy Now Pay Later?

Buy Now Pay Later is a short-term financing option that allows consumers to make purchases and pay for them later, generally without interest. This is a new tool in the region, as this is how a purchase made with a credit card and store credit works. However, we must tell you that BNPL is not the same as a credit card model, as it has rules designed to avoid greater credit risks and defaults.

In general, BNPL works as follows: it is the merchant who decides to offer this option, hiring a specialized BNPL provider - usually fintechs and institutions that operate with credit services. When a business (whether physical or virtual) offers this payment method, the customer:

• Can buy a product without having to pay everything at once;
• Depending on the case, they can choose to start by paying an initial installment or spread the total evenly, without interest, over a set period (which usually varies between 30 days and 12 months);
• Must follow the installment schedule (if the person does not pay the debt within the stipulated time, interest is added to the installments or a penalty/late fee is charged).

The provider offering BNPL to the merchant charges fees for the services offered. If a merchant wants to receive the total amount of an installment purchase in their business, it is common for operators offering BNPL options to charge them loan rates of 3% to 6% per purchase. Additionally, there are also fees similar to the interchange fee for the use of financial services.

What is the difference between Buy Now Pay Later, credit card, and credit?

Unlike credit cards, BNPL services are not mediated by flags (which allow the card to be accepted at virtually any terminal). Each merchant decides to offer the option of paying through BNPL, integrated with specialized providers. Each of these providers has its own terms and conditions, such as the number of installments allowed for each purchase and interest adjustments.

In Latam, the concept of Buy Now Pay Later may not yet be well known because there are already other ways to split purchases into installments in the market. Among them is one that closely resembles BNPL: store-offered credit. However, in this well-known financing model, the installments are fixed with added interest, thus the purchased product ends up being more expensive than if bought with a lump-sum payment. In BNPL, the consumer does not need to have any registration with the store, for example.

Advantages and opportunities of Buy Now Pay Later

Buy Now Pay Later offers some advantages for both consumers and merchants. For example, customers have some conveniences at their disposal, such as:

• The ability to easily pay for more expensive purchases by splitting them into installments.
• An additional payment option for the consumer, who can choose the one that best fits their current financial situation.
• Greater convenience in managing installments, as many BNPL providers allow consumers to automate payments and change the way they are made during the payment period.
• More payment possibilities using cards, as various specialized fintechs are already using a model that integrates BNPL with card networks. This means that the terminal networks of these cards can be used to make payments with Buy Now Pay Later at different merchants, even those that have not opted to offer their own BNPL service.

On the other hand, for merchants, BNPL:

• Offers more payment options to merchants, improving customer experience and helping to drive sales and loyalty.
• Provides liquidity to the merchant: in some cases, the merchant can receive the full amount of a customer's installment purchase in exchange for a fee paid to the BNPL provider.

Figures show how BNPL is becoming increasingly relevant to offer to customers.

Globally, the advantages of offering payments through BNPL are reflected in business opportunities, allowing for revenue expansion by diversifying digital payment methods and improving the entire sales process with customers.

According to a 2021 C+R survey, 60% of U.S. consumers surveyed reported using some form of Buy Now Pay Later payment model, with an average of USD 883 owed per purchase. Additionally, 56% of those who used these services stated they prefer this model over credit cards because it is "easier and more flexible to pay."

Globally, GlobalData estimates that the BNPL market will reach a value of over 1 billion dollars by 2030. Meanwhile, in Latin America, this model is gradually gaining ground and becoming a trend in countries with different realities, such as Brazil and Mexico. While in Brazil, the culture of credit and installment sales makes BNPL an ever-present opportunity, in Mexico it is increasingly reaching the segment of people who do not frequently use the banking system (almost half of the population).

In countries like Brazil, which is rapidly advancing with the open banking / open finance experience, the potential of BNPL tends to be even stronger and more accessible, according to our Head of Product in Brazil, Bruno Martucci:

When purchasing something from an e-commerce store, the user will be able to finance the payment in installments through a bank X or Y, or even through credit companies, quickly and conveniently. By combining BNPL with Open Finance, more options are offered to the user and, naturally, with reduced costs.

And the challenges and risks?

On one hand, for the financial market, Buy Now Pay Later offers opportunities for expansion and diversification. Today, major consultancies like EY indicate that BNPL already stimulates the development of digital solutions that facilitate credit analysis, integration with merchants, payment management, and customer experience. However, this market must develop sustainably and minimize risks.

Some of the challenges characterizing the sector are:

• Fierce competition: the model faces significant competitors in the market, such as credit cards and store credit.
• Uncertain regulation: BNPL may be subject to changes in rules and laws, requiring adaptations and adjustments by its providers.
• Risk management: due to its easy adoption, the BNPL model may involve risks of default, cancellation, or return of purchases, in addition to data security issues, affecting business profitability and sustainability.
• Financial education: BNPL is an efficient way to defer payment for purchases, so the model must be attentive to the risks of promoting irresponsible or impulsive consumption by customers.

How to enter this model by offering financial services?

Buy Now Pay Later offers advantages for consumers, which means many opportunities for merchants and financial service providers looking to expand their possibilities. For example:

• If your fintech or institution offers credit services, you can develop a specialized BNPL unit to position yourself as a provider.
• It is also possible to offer cards with integrated BNPL, as various fintech companies in Latin America and other regions do, facilitating the popularization of the model.

Considering the growing potential of BNPL to become a "favorite" payment model among consumers, there is a market of opportunities to adopt it as a merchant or financial service provider.

If you wish to establish your own BNPL operation, the first step is to have a specialized partner in fintech infrastructure to facilitate the development of this business model. With this type of partnership, you will have ease in obtaining customized and licensed financial services, cards, all the technological infrastructure behind your platform, credit engines, and risk management systems, among others!