There has been a lot of hype in the media about buy-it-now-pay-later (BNPL) solutions in 2021. It’s no wonder BNPL has risen to prominence. Fueled by the COVID-19 pandemic, e-commerce transactions as a percentage of total retail sales grew rapidly in 2021, and an estimated 20% of American adults used BNPL in the past year.
The first generation of BNPL solutions that became available in the market offered installment loans, and this is still the most common BNPL offer. With this type of financing, a consumer applies once for a short-term loan to finance a single transaction over a fixed number of installments. This provides limited benefit to those who purchase and market goods and services, particularly merchants whose products lend themselves to recurring or subscription purchases (e.g. cosmetics, pet supplies, automotive accessories, etc.) . When that loan matures, the funding closes with it. Consumers must apply for a new installment loan each time they make a purchase.
The rise of digital revolving credit
In 2022, a new category of e-commerce finance will gain prominence in the BNPL space to cater to this popular purchase category: recurring purchases. Digital revolving credit offers far greater benefits to merchants, allowing them to leverage predictable revenue streams and create loyal, long-term customers. It refers to an account that the consumer can open and then reuse over and over again, instead of repaying a single purchase on a short-term installment schedule and terminating the loan. It therefore lends itself to these recurring purchases by subscription.
Digital revolving credit will usher in a more merchant-centric era of e-commerce payments in the BNPL space. Benefits for merchants include the ability to foster better brand loyalty and increased customer lifetime value (CLV). A continuous, open line of credit is a much more merchant-friendly construct than offering installment loans.
This more flexible “lifecycle credit” approach will gain traction, allowing consumers to open a reusable line of credit with a merchant. It can be maintained over the long term, drawn again and again from a network of approved merchants. The repayment schedule is flexible over as many months as the customer wants, unlike a fixed installment loan which typically has to be repaid in four months. This could best be described as “buy often, pay much later” as opposed to “buy now, pay later”.
Additionally, a closed-loop digital credit platform operates off the traditional credit card “rails”. A history of all customer purchases from all network merchants is kept in the system. This facilitates inter-merchant marketing, whereby the products of other complementary merchants can be marketed to buyers.
Benefits for merchants and consumers
This is not only convenient for consumers, but also beneficial for merchants, as the credit provider can maintain a long-term relationship with that customer over one-time BNPL transactions. In addition to building loyalty, it also reduces acquisition costs. A digital revolving credit model has proven to be the most stable business option, as customers who have long-term relationships with their payment providers have more incentive to stay in good standing, so they tend to default less .
A recent informal survey of e-commerce systems integrators conducted by FuturePay revealed that approximately 40% of their merchant customers have already implemented a BNPL solution. This indicates a good remaining market opportunity for BNPL. Merchants who have not yet implemented a BNPL option (and even those who do) will want to consider the distinctions between BNPL installment loan providers and digital revolving credit solutions, as the differentiators directly impact on aligning the financing solution with their long-term goals.
Since BNPL installment loan providers only offer short-term loans, they are generally less demanding on the credit status of buyers, which has recently led to increased regulatory scrutiny. On the other hand, revolving credit implies an ongoing customer relationship. As a result, only qualified consumers with viable credit profiles are accepted. And with today’s sophisticated credit underwriting technology, these applicants can be approved in seconds.
When consumers are incentivized to reuse their line of credit and establish a long-term relationship with the supplier, it increases CLV. Since it takes far more resources to acquire a new customer than to nurture one, this is an important metric. The more user-friendly approach of digital revolving credit, compared to BNPL installment loans, will lead to increased adoption in 2022 and beyond.
Tim Harris is CEO of FuturePay Holdings Inc.