The Buy Now, Pay-Later (BNPL) market, which combines the power of digital technology with embedded lending models, is currently experiencing a record-breaking boom as consumer adoption and BNPL acquisitions and consolidations accelerate. And though BNPL’s appeal is undeniable (it’s currently the fastest-growing online payment method in the US and UK), challenges to its disruptive potential are also on the rise – from a likely regulatory crackdown (especially in European markets) to criticism around lagging consumer education for BNPL products. Still, the BNPL market holds a great deal of opportunity for insurers, especially when it comes to underwriting providers and credit risk insurance
BNPL is a short-term financing product that allows consumers to defer making a lump sum payment at the point of sale by breaking up their payment into a series of smaller, installment payments made on a fixed schedule. In the DTC model, BNPL is typically offered by a third-party service provider (like Klarna or AfterPay) with a very simple, frictionless sign-up process that takes only a minute or two. The service provider presents the user with financing offers starting at 0% or other very low interest rates, usually based on their soft credit score (i.e. details from current and past purchases). This type of credit risk assessment generally leads to higher acceptance scores for BNPL than you’d see with traditional credit. Merchants receive payments immediately, with the BNPL provider wholly assuming the risk (i.e. fraud, chargebacks or payment defaults).
While merchants must pay a fee to BNPL providers for these services, the benefits seem to more than outweigh their costs – as BNPL has been shown to significantly boost traffic, conversion rates, average order value, and retention. It also satisfies the shopping habits of Millennials and Gen Z-ers who are debt-averse and overwhelmingly prefer self-service, e-commerce experiences.
In addition to its DTC applications, BNPL has made a splash in the B2B e-commerce space. Provider Hokodo offers a BNPL solution for B2B merchants so they can offer trade credit to their online customers. Hokodo’s proprietary underwriting engine also helps merchants determine which customers are eligible for payment terms, while simultaneously protecting them from non-payment risk.
Even with clear benefits to consumers and merchants, criticisms of BNPL have surfaced. In Europe, there is growing concern that BNPL is under-regulated (in some countries BNPL vendors have managed to exempt their product from the stricter definitions applied to consumer credit products.) However, increased regulations are widely expected in the space, with Europe-wide measures anticipated in 2022 or 2023. And, recently, the Financial Conduct Authority (FCA) in the UK identified BNPL’s key risks for consumers and the broader credit market, citing the following issues:
- lack of information for consumers around BNPL features (zero-credit can come with hidden costs);
- no consumer creditworthiness assessment (credit origination is too easy); and
- potential creation of too much debt (spending more than one can afford).
FinTechs and BNPL vendors have mobilized to address some of these concerns, introducing an assortment of value-added features and products that aim to improve financial literacy and which can support more traditional banking products.
The BNPL global landscape is rapidly transforming, with many different types of organizations adopting frictionless, alternative payment options for an ever-expanding range of goods and services. If this holds, there will be a growing opportunity for insurers to protect buyers and sellers through credit risk insurance. Embedded insurance products may also increasingly be bundled with BNPL offers (your exercise bike purchase, for example, might contain embedded shipping, product and warranty insurance, plus supplemental heart attack coverage). In addition to these BNPL bundles, the insurance industry can participate by positioning itself as a trusted intermediary between customers and sellers, helping to maintain a sense of fair play and offering content and products aimed to increase financial literacy. Finally, savvy insurers should be considering the relevance and usefulness of alternative payment methods like BNPL for many of its products and services – tracking the influence of consumers as part of a user-centric approach to product development.