The rise of BNPL in physical retail

Innovative payment methods have increasingly reshaped the financial landscape in recent years, with the 'Buy Now Pay Later' (BNPL) system emerging as a standout example. BNPL has been around for a long time, but the consumer experience was clunky, often requiring the completion of many paper forms. In the physical retail scene, BNPL redefines the traditional shopping experience, allowing customers to delay or divide their payments. This shift towards BNPL solutions reflects a broader trend in the financial industry, driven by consumer preferences and demands that are bringing about significant changes.

Online platforms have indeed been using BNPL for a while. Still, a mainstreaming using in physical stores is a more recent endeavour. Despite BNPL's estimated share of nearly 5% of all global e-commerce transactions by 2025(1), the penetration of BNPL in physical retail, accounting for 85% of all retail dealings in the US(2) for example, remains in its infancy. Addressing this gap, major players like Afterpay are forming strategic alliances, with for instance its partnership with Sephora in the US launched in 2022 for both online and in-store. Also highlighting this shift,  prominent BNPL provider Splitit announced a collaboration with point-of-sale terminal hardware and software provider Ingenico in early 2023. This partnership enables retailers to provide payment plans during checkout without requiring customers to register with a third-party payment service. Given Ingenico's presence with 40 million POS terminals globally, it could prove to be a game-changer. This move aligns with the industry's desire for a streamlined BNPL experience, eliminating lengthy registration and underwriting processes.

In France, omnichannel management software company Lundi Matin is actively collaborating with key BNPL players such as Alma, Pledg, and Oney to integrate them into the group's POS software. This comprehensive integration with cash register RoverCash is expected by Lundi Matin to boost merchants’ average customer basket by 15 to 20%(3), to provide customers with swift payment options, and to deliver a seamless shopping experience. This will also contribute to streamlining customer onboarding, maintaining transaction traceability for accounting purposes, and even printing upcoming payment schedules on receipts for added convenience.

In fact, for many retailers, introducing in-store BNPL often involves integrating it into their POS system through partnerships. For instance, the fast-fashion brand Forever 21 offers in-person shoppers the choice of Klarna or Afterpay. In Italy, Compass’ BNPL digital solution PagoLight is available on Nexi SmartPOS. This allows Nexi’s partner banks to provide retailers with an innovative solution for deferred payments directly integrated in the payment terminal and also offers customers the possibility to purchase and enjoy goods without paying upfront the full amount.

High-value items such as furniture, high end clothing, and home improvements present the most promise for in-store BNPL. Customers in these sectors often prefer seeing products first-hand, especially when prices range between $500 and $5,000. In Europe, and particularly in France, BNPL's attraction is undeniable, and it is estimated that 40% of the French population has used BNPL, leading to an annual transaction value of €4.5 billion in 2022(4). Market estimates showed BNPL transactions in France would be about 20% higher in 2023 than in 2022(5) and an increasing number of brick-and-mortar stores are adding BNPL as a payment option for their customers.

Key benefits of in-store BNPL

For providers, it addresses an untapped market potential: the in-store BNPL arena presents a less crowded competitive landscape compared to its online counterpart. Additionally, as the BNPL market has become highly competitive in e-commerce-driven regions such as Europe, Australia, and the US, there is an opportunity for new BNPL entrants to establish a presence in emerging markets across Asia, the Middle East, Africa, and Latin America, both online and in-store.

Merchants stand to benefit significantly, primarily through improved conversion and increased average spend: BNPL can elevate consumer spending, with certain retailers reporting up to 40% growth in transaction value. The integration process of BNPL is also swift, efficient, and minimally disruptive for both retailers and consumers. BNPL guarantees a consistent shopping experience, irrespective of the selected platform whether it is online or in physical stores.

Finally, end-consumers enjoy similar benefits to online BNPL options, particularly in terms of payment flexibility. This is especially prominent within the 22-44 age group, which demonstrates a preference for dividing substantial purchases into smaller monthly payments. And BNPL offers transparent terms, with clear payment structures and no hidden costs in contrast to traditional credit methods.

How banks could navigate the BNPL threats and opportunities

While technological advancements and product innovation are reshaping the card market, traditional banks face a substantial challenge due to the growing appeal of BNPL. Indeed, BNPL  may impact banks’ ability to retain and attract customers. BNPL providers could select different payment rails leveraging bank account infrastructure rather than card payments and there is a real possibility that customers might select alternative products, moving away from traditional cards. To stay competitive, banks could venture into the thriving BNPL sector by integrating BNPL options into their existing card services. This would offer customers the flexibility to access credit and spread payment costs as needed, both online and at the point of sale.

Regulatory shifts and the impact of the new European Directive on Consumer Credit

Yet, as BNPL gains traction, it also faces potential changes as BNPL providers will now have to comply with stricter regulations and consumer credit regulations set in the new European Directive On Consumer Credit adopted by the European Council on 12th October 2023. This revised directive, focusing on credits under 200 €, seeks to set transparent guidelines for split payments and curb excessive debt scenarios. These regulatory changes have the potential to bring about a transformation in the business model and marketing practices of BNPL services in Europe, and worldwide.

The BNPL market is expected to continue growing in the coming years, while also undergoing significant changes, notably due to the potential impact of rising interest rates

To conclude, the BNPL market is experiencing rapid and continuous growth with significant prospects for evolution. However, to fully grasp its impact, it's essential to consider several key elements. Firstly, data plays a crucial role as BNPL often serves as a customer acquisition tool for providers who can then leverage this data to offer other lending products to customers. Additionally, the rise in interest rates can have a major impact on the economic model, especially for fintech companies, affecting their financial stability. Furthermore, the market currently features numerous providers, suggesting a potential consolidation phase in the future.

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The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).