November 2022

Where to next for consumer finance?

Is there a better way to offer consumer finance? Learn how the tide is turning against BNPL and how retailers can respond to the changes ahead.

The face of consumer finance has changed dramatically in recent years, in part due to the surge in popularity of buy now, pay later (BNPL) services. BNPL has not only disrupted the financial services industry, but it’s also changed how millions of consumers pay for everything from clothing and homewares to medical bills and big-ticket items. 

Shoppers are increasingly using BNPL to replace more traditional payment methods. In fact, only 8% of people preferred to use a credit card or overdraft when a BNPL option is available. And as consumers and retailers embraced the latest payment trend, the number of BNPL providers grew around the world.

But after such a rapid period of growth, is the tide turning for BNPL?

We look at the changing face of consumer finance, the challenges facing the industry, and how retailers can harness the best of what BNPL has to offer.

What’s behind the BNPL boom?

The structure behind BNPL finance isn’t new. Point-of-sale (POS) finance options, where customers pay by instalments, have been around in various forms for decades. So, what exactly is driving the popularity of BNPL, and why now?

Consumers are being drawn to BNPL by:

  • Easy-to-use digital platforms – Digitisation has made this type of finance more accessible and attractive, thanks to heavy investment in UX, design, and marketing. New technology has also meant smooth integration of BNPL products into websites, apps, and in-store checkouts.
  • A more satisfying shopping experience – Customers can now seamlessly continue their purchase, even when the amount at the checkout is higher than their initial estimate. BNPL makes it easy to make a purchase and then spread costs over time, especially if a customer already holds a BNPL account. 
  • A perception of “better” credit – Loss of confidence in banks and traditional financial services providers is an ongoing issue for consumers who have become wary of the potential to get into serious debt on their credit cards. There is a perception that BNPL services are less risky as they’re often marketed as interest-free, and people can, unfortunately, overlook the account and late fees that some providers charge. 

Merchants and retailers are leveraging the benefits of BNPL to:

  • Meet customer expectations and keep up with market trends – Customers don’t want to wait to make a purchase, and expect easy access to finance if they need it. This makes offering instalment plans a necessity, rather than an optional extra for merchants.
  • Increase sales – Giving customers the means to pay over time results in improvements across a range of key market share markers. This includes a 72% improvement in sales conversions and a 58% improvement in attracting new-to-business customers for UK-based merchants, according to the Global State of the Industry 2022 report by RFI Global. 
  • Encourage return visits – Research has shown that around one-third of BNPL users are drawn to the service because it makes the checkout process easier. Offering instalment payments gives your customers payment ease and flexibility, which can encourage return visits. 
“BNPL fought for market share against credit cards and did very well. They succeeded initially because of a distrust of banks, poor customer experiences, and a fear of getting into excessive debt.” 
– Marnix Poot, Business Development and Partnerships, etika

BNPL is facing a time of reckoning

While BNPL has grown rapidly in recent years, it’s an evolving industry facing several challenges:  

  • New, high-profile players like banks and tech companies are entering the market, leaving customers (and merchants) confused with too many options at the checkout. 
  • Some existing BNPLs are consolidating or floundering after suffering significant share price plunges.
  • Retailers are feeling the pinch over merchant fees in an environment of rising costs across the supply chain. 
  • Warnings against irresponsible lending are growing from financial watchdogs and consumer groups, with concerns that vulnerable community members may not understand the consequences of taking on debt, or have adequate means to pay it off.  
  • BNPL providers have so far been exempt from Financial Conduct Authority regulations. The UK government is working on changing this, with plans to have secondary legislation in place by mid-2023. This means lenders will need FCA approval and will need to offer affordability checks to potential customers. 

These concerns have become major sticking points for critics of BNPL, and have left many wondering whether the BNPL bubble is set to burst.

“As we’ve seen before, niche and new eventually becomes mainstream. BNPL might have offered an advantage in the past, but now it’s just become a given - though at what cost? You no longer own the customer, the customer experience is out of your control, and it can be hard to align your finance offering to the ethical values of your customer base.” 
– Marnix Poot, Business Development and Partnerships, etika

Where to next for retailers and merchants?

While industry conditions are uncertain, the appetite for consumer finance clearly isn’t disappearing. Economic hardship, rising inflation, and interest rate pressures have combined to fan the flames, making it even more vital for consumers to find flexible ways to fund purchases. 

Retailers have also become reliant on BNPL. Research shows that BNPL-accepting merchants have been able to raise their average value of purchases by 28% and the total volume of purchases by 36%. It’s become an excellent tool for increasing the profitability and growth of retail businesses, and one retailers would likely struggle without. 

It seems that point-of-sale finance is here to stay and that the winners will be finance options that balance revenue growth with doing right by customers, and focusing on responsible lending. 

etika is an ethical alternative

Choosing etika as your partner gives you an ethical and transparent point-of-sale finance solution. You can offer the benefits of instalment payment plans to your customers without the drawbacks of many mainstream BNPL providers, thanks to:

  • No interest, late fees, or account fees
  • Fair and transparent merchant fees with no surprises
  • Flexible instalment plans where you and your customers decide the contract duration and amount
  • Credit checks on all customers in accordance with a responsible and fair approach to lending money
  • An omnichannel solution that’s available instore and online
  • White-label products that give you full ownership of the customer experience
  • A brand that’s known for ethical partnerships with retailers selling longer-lasting, higher-value items. 

Learn more about how etika’s point-of-sale finance solutions can help you adapt in a rapidly evolving consumer credit market, and how they provide the fair, transparent, and flexible solutions that you and your customers are looking for.

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