BNPL is not the same as traditional lending.
It creates a rare win-win-win for Consumers, Merchants & Banks.
Here are 7 key attributes that make BNPL work as it is meant to 👇 .
All these parameters need to be in place, simultaneously
1. POS finance has existed for a long time. This usually involves a loan application which is then approved or declined, and the borrower goes on to pay interest over a pre-determined period of time.
BNPL means that if the dress cost me 1000, the consumer can pay for it in 3 installations of INR 333 each over 3 months.
2. In BNPL is free for the consumer but the merchant pays a merchant discount rate (MDR)
Ex: if the dress we bought cost 1000, the merchant only gets something like 970 for selling it. The BNPL provider gets the remaining discount rate. (3% or this example)
3. BNPL results in higher sales conversion for the merchant as spreading payments over several months lightens the burden on a consumer’s cash flows.
The merchant is only willing to pay the MDR because they can sell more goods and services if they use BNPL.
A merchant would rather sell eight dresses and collect 970 per dress than selling five dresses and collecting 1000 per dress.
4. BNPL works best when the purchase is discretionary
5. BNPL works best with good credit quality customers. The BNPL provider has many costs, If the merchant discount is 3%, the BNPL now has to pay :
– Cost of finance
– Operational costs
– Credit losses
In the example above, If the credit losses go to 2% the BNPL provider suddenly starts losing money. Which increases the borrowing rate.
6. BNPL has a high conversion rate of at least 75-80% of consumers are approved for the BNPL product.
7. BNPL is frictionless In order to avoid the merchant worrying about customer friction, the BNPL process itself has to be tech-driven, seamless and embedded.
When you deviate from what makes it unique, a cascading failure takes place and everything breaks down
When assembled correctly, these 7 pillars can support a win-win-win outcome where the merchant, the customer, and the BNPL provider