When a House Subcommittee on Financial Services hearing titled “Buy Now, Pay More Later?” was convened last November, it was clear that rising installment debt is a concern at high levels. It’s heating up more now, and market watchers see big changes ahead.

Discussing the coming shift, Nandan Sheth, CEO of Splitit, told PYMNTS’ Karen Webster that while paying over time will always be popular, the current economics of the pure-play model just don’t make sense.

As a result, he suspects consumers will begin to see differences in the terms they are offered when applying for credit and a tightening of underwriting standards that could limit their capacity to lend, even to those who were extended pay-in-three or -four options in the past.

In short, he said, the buy now, pay later (BNPL) market is due for a sharp course correction, maybe within the next 12 months. Sheth contended that many of the BNPL pure-plays with millions of customers may see their user bases look to banks and other financial service providers for the installment programs that are the appeal of the BNPL proposition.

“There will still be consolidation,” Sheth said, “and unfortunately, I think some will not survive.”

The Rise of BNPL 2.0

Sheth said that the FinTech BNPL model is driven by a tolerance of risk that doesn’t seem natural for most other businesses that lend.

When compounded with the fairly large cost of acquiring consumers and the fact that consumers have to change behaviors to use the option, Sheth said it becomes “super hard” for BNPL players to manage, particularly given the way the economy has been changing on a macro level recently.

With ticket sizes on BNPL purchases rising — Sheth said that Splitit just broke the $1,000 boundary for the first time, and consumers are also experimenting with pay-in-six, and even pay-in-12 — he said that BNPL platforms need to control these trends or risk defaults in an inflationary time.

“We’re actually trying to temper the [longer-term installment payback periods] enthusiasm and say, ‘You know what? Pay in 12, let’s do that very carefully. Let’s start with four and six, see how that goes. Let’s measure the repayment history,’” he added.

PYMNTS’ latest BNPL data, from a national sample of more than 3,000 U.S. consumers conducted in May, shows that BNPL has been steadily growing, now accounting for 4% of purchases made in store and 6% of purchases made online. Ten percent of millennials use a BNPL product every month.

Read more: Study: 10% of Millennials Use BNPL Monthly

Whose Customer Is It?

In the end, Sheth said the debate over who gets the credit, so to speak, for enabling BNPL on a merchant page is coming to a boiling point. Answering such lingering questions around consumer perception “is going to drive conversion, which is a big passion for all of us,” he added.

As for Splitit’s thinking on this, Sheth said that in the future, consumers will see the card art of their issuer when they are presented with a BNPL option as part of their shopping journey.

His view is that it instills much greater loyalty for that merchant, because BNPL becomes just a feature, not a product of the payment instrument making the purchase. So, the consumer sees the merchant as an enabler, with the installment plan capabilities that drive the purchase as coming from the issuer.

“The main star should be the merchant and their brand, not the BNPL brand, because the merchant wants to drive loyalty with that consumer because they offer this [BNPL] flexibility, and they pay for it,” Sheth said. “The merchant is paying for this. Remember that.”

The Key Differentiator

Sheth said he sees BNPL working best as one credit option among many, rather than a stand-alone product. That’s where he sees the sector moving as it learns from observations made over past two years and repositions.

That’s also consistent with how Splitit now goes to market. The company has done its own pivot in a sense, going from a checkout option on a merchant page to a white-label Installments-as-a-Service platform that connects to acquirers to enable BNPL for any consumer presenting a Visa or Mastercard at checkout.

That makes Splitit “very embedded in the checkout flow, and there is no separate account or action that a consumer has to take to enable it,” Sheth said.

See also: How BNPL Upended Nearly a Century of Installment Payments

The company’s big unlock is the $3 trillion of unused credit that consumers have on their existing cards. The same card they’d always use at checkout can now become an installment payment plan for that purchase.

Sheth said that is a key differentiator, as well as a big lift for issuers who have the credit relationship with the customer but lack the “elegant tech stack” to turn buy-on-an-existing-card into an installment loan.

It’s the significant technical debt of banks that makes merchant integration at the point of sale challenging, one of the reasons their current installment option is largely post-purchase.

“Because the core competency of a bank is lending, they need an elegant tech stack to take what consumers have today in available credit to merchants and provide the option for those merchants to pay for the convenience,” he said.

The Future

Does that mean that banks snap up alternate lenders?

Sheth said he doesn’t think so, because banks already have BNPL-like services built into revolving credit lines. However, they can play a larger role in the space by embracing tech stacks that make those offerings more attractive to retailers, essentially borrowing from the FinTech playbook and wrapping their robust lending operations into an easy-to-use, easy-to-market package.

Related: Third Generation of BNPL Holds Potential to Reshape Entire Credit Industry

However, it’s not like the the pure-plays will simply shut their doors. Sheth said major BNPL brands have “large balance sheets, super smart people [and] a critical mass of customers,” and so will find a way to pivot to embedded financial services to make the model work.

Even so, he fears the pivot will still be a challenge, given the larger digital bank competition and the rising cost of customer acquisition.

For Sheth and Splitit, the focus remains on working with card networks and issuers to simplify the BNPL experience for the consumer, using products consumers have in their wallets and know how to use.

“The biggest focus on our side working with networks and working with issuers is, ‘How do we simplify this with consumers?’” Sheth said. “I think you’ll see much better alignment with the consumer as this becomes much more mainstream.”

Read more: Splitit Joins Visa Ready for BNPL Program



About: PYMNTS’ survey of 2,094 consumers for The Tailored Shopping Experience report, a collaboration with Elastic Path, shows where merchants are getting it right and where they need to up their game to deliver a customized shopping experience.

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