Whether you believe the business of Buy Now, Pay Later has stalled, or is simply experiencing a course correction, it would be hard to argue that its adoption by the next generation of banking customers has been significant. In just four years, the category went from infancy to market penetration numbers in digitally native groups of 37.2% of Millennials and 44.1% of Gen Z consumers (ages 14 to 25).
That adoption has in large part been driven by BNPL’s customer-centric experience design which serves as yet another nod in the direction of banking becoming largely digital. That continuing evolution toward digital-centric banking is especially significant for regional banks as they look to stay ahead of the competition with similarly frictionless products and services.
At g2o, we’ve been following BNPL since its inception, which brought the typical exuberance of an innovative, technically driven solution, along with the subsequent market realization of how it is best leveraged.
The BNPL Evolution
While it started as an online based consumer loan for small to mid-sized purchases with repayment terms of 4 bi-weekly payments, this momentum has led to a blurring of the lines with organizations extending BNPL repayment terms and credit limits to as high as 18 months and veering towards the territory of more traditional financing. Likewise, how consumers are using BNPL has changed, impacting their behavior, and potentially increasing both the risks and the regrets.
These trends have created a controversy as to whether the tool is benefiting or hurting consumers, with BNPL in the news recently for two main reasons: stories of negligent use by consumers and subsequently, layoffs at BNPL companies faced with the challenges of collecting payments. Certainly, incentives such as higher conversion and larger cart size (up to 25% for luggage brand Samsonite for example), have made adding the option a no-brainer for retailers, with BNPL now so commonplace that 66% of U.S. consumers surveyed said they would abandon a purchase if it wasn’t offered. This expectation, the ease of use, and the ubiquity of the offering across retail and branded eCommerce experiences has caused the average total debt owed by users of BNPL services to near $900 with users currently paying for 3.8 items simultaneously in installments.
We can learn a lot about the future of banking from the BNPL story, by looking at both how the emerging payment trend has changed consumer behavior and how the market has started to course correct. And we can identify some key lessons for regional banks and determine how to apply those insights to their customer experiences and digital banking strategies.
BNPL Consumer Behavior and Course Correction
A 2021 study by Morning Consult, and many BNPL proponents point to indications that certain consumers are leveraging the convenience and flexibility of the tool to achieve their financial goals. For example, 80% had enough money in the bank to afford the item at the time of purchase, but used BNPL to protect their financial cushion. But over utilization of BNPL has also led to consumers reporting higher financial volatility, with upwards of 57% saying they have made a purchase they regret and 46% believing they will fall behind in payments over the next 12 months. Of note, BNPL + Credit Card users are far more likely to have and to report progress towards their goals, indicating these consumers are making specific decisions about when to use each and how they impact their finances differently.
As consumers adjust based on experiences, both positive and less so, with BNPL, market forces are also impacting the current landscape. Increasing interest rates and borrowing costs will eat into the profitability of those dependent on ongoing investment. One of the largest players in the BNPL space, Klarna, is raising money at a valuation of 15 billion, down from 45 Billion last June. Meanwhile, out of category competition is getting in the game, like Apple Pay’s new Apple Pay Later, indicating that non-traditional banking companies have observed the shifts and are building on the lessons learned thus far.
Ultimately, this behavior illustrates what consumers want from financial services: tools with clear ways to help them understand, plan, and leverage flexibility to achieve their financial goals. These learnings are not just applicable to the continued success of tech companies that are making forays into the financial services space, but they are also increasingly important for regional banks to understand as they compete to meet the needs of existing customers and to attract new customers to their brands. With this insight, the critical question for banks becomes what makes these new online tools attractive over similar products offered by financial institutions?
Takeaways for Regional Banks from the Buy Now, Pay Later Story
While the BNPL story will continue to unfold, the "why’s" behind the trend shouldn’t be ignored. Here are 5 takeaways from BNPL that regional banks should consider in their efforts to stay relevant in the ever-changing and increasingly digital-centric financial landscape:
- Specific. BNPL products were not positioned as vague financial products, such as a “Personal Loan” that one needed to apply for and wait on. Rather, they were positioned as quite the opposite. They’ve been marketed as an easy access financial tool to fulfill a consumer’s desire to pay over time without the risk of additional fees, spreading out the impact of purchasing smaller or more moderately expensive items. In simple terms, BNPL was positioned to encourage customers to convert on purchase considerations without the fear of depleting their accounts.
- Easy to Find, Easy to Understand. Easy to Use. These services didn’t need to be sought out every time a consumer wanted to make a purchase. Prominent placement on product pages and directly within the checkout process as well as terms that were easy to understand and straightforward— no interest rate math, no Googling what APR means, a clearly communicated breakdown of payments to help buyers understand what to expect—aligned perfectly with today’s consumers’ desires for transparency and frictionless shopping experiences.
- Streamlined. Successful BNPL vendors strove to make the application process as lightweight as signing up for a new social media account. There are no 10 screen applications requesting information the institution already has on file or delays waiting for approval. The risk to the BNPL vendor for a loan of $100 is recognized as vastly different from a $10,000 home improvement loan and it’s been treated that way.
- Digital and Mobile Forward. As innovation and technology continue to further minimize the friction of digital shopping experiences across channels, it’s understood that not just mobile enabled, but “mobile-first” experiences are critical and central to a financial service provider's success. According to Newsweek, 75% of Gen Z shops on their mobile phones. With BNPL, everything from signing up, to paying for goods, managing one's account, and paying off the loan can be, and most-often is, handled right from the palm of the consumer’s hand. Predominant users of these services, Millennials and Gen Zers, have come to expect always-on, accessible anywhere, digital-centricity. In fact 75% state they won’t use a bank without an online application process (for context, nearly 90% of this group will use online or mobile banking).
Putting BNPL Lessons into Practice
In discussing this hot topic directly with our clients as well as in research roundtables, the challenge of executing against these takeaways can feel like playing catch up for regional banks that are trying to compete against national players within the digital product and deployed technologies space.
Often, that leads regional players to strive for creating “white glove services” that, while they might help customers in new and/or unexpected ways, require heavy personnel touchpoints and human engagement.
While the mentality makes sense, obviously we want to ensure loyalty and attract prospects based on a reputation of quality and personal service, it can overlook key lessons from the FinTech wave, including how to:
- Extend the bank’s services using technology to help the customer meet and solve their problems online.
- Target the impactful moments for customization to differentiate and set your bank experience apart.
- Streamline onboarding and application processes – don't make your customers give you information you already have.
- Create personalized experiences, using in-house data to automate processes and build tools that lead customers to products and services most beneficial to them.
Unsure where to begin? The worst thing you can do is try to change everything all at once or immediately go big. Rather, we recommend starting with more specific and potentially smaller targets and growing your efforts based on initial successes and what’s learned about your customers’ interactions and usage over time.
Taking the First Steps
Depending on where you are as an organization, there are a few places that make sense to start, all of which share one thing in common: Putting the Customer First. Evaluate what makes sense for your situation, keeping in mind that it’s the banks that actually get going that will remain relevant.
Accelerate a customer-centric company mindset and perspective by starting with a Design Thinking workshop.
- A great way for your existing teams to see all you offer through the eyes of your customer and learn new problem-solving skills.
- Leverage an outside perspective on specific customer problems or learn how to prioritize your organization’s workflows.
- Energize your team and hone skills together that will generate ongoing returns in the form of more successful product and feature launches.
Make it a priority to truly know your customer and let the data drive.
- Look at a wide variety of internal data, incorporating sources from surveys to complaints, and even chat logs to uncover unexpected hurdles in the customer journey. What works for you as a company may be seen quite differently from the customer’s point of view.
- Employ external data sources from secondary data sets as well as qualitative research to broaden the picture. Customers (and prospects) will tell you what they care about, you only have to ask and then actively listen.
- Allow data to help bring themes together. And if you’re feeling buried in it? Leverage a classification system to avoid being overwhelmed and hone in on meaning as well to help you identify your biggest opportunities for impact.
Pair services to priorities.
- Match up capabilities for specific white glove services to new and emerging technologies to stay ahead of market trends.
- Prioritize where customers want and need help. Again, listen and they’ll tell you.
- Match your customer experience priorities with your business goals so you can truly create a strategic roadmap and then follow it.
Don’t let the lessons from the Buy Now, Pay Later story pass your company by. Improving your customer experience is a marathon, not a sprint. And it starts by taking the first steps to build momentum and stay relevant in the ever-changing financial market.
At g2o we walk hand-in-hand with our clients through the customer experience transformation they need to understand their customers, create strategic roadmaps to meet the customers’ needs, and empower them to turn those roadmaps into action.
Contact g2o for a Customer Experience Strategy Discussion with one of our Experience Experts.