By Tina Giorgio
Buy now, pay later or BNPL, is the latest cautionary payments tale for community banks. Much like digital wallets, its appeal—with instant gratification and integrated payment at checkout—has taken hold with Gen Z and millennials. In fact, 59 percent of Gen Z and 47 percent of millennials report using the service, accounting for more than 80 percent of BNPL transactions.
A cousin to traditional layaway programs, BNPL lets a consumer purchase a product and take ownership of it immediately, paying it off in a series of incremental transactions. This new, own-now-but-be-liable-later approach speaks to the U.S. consumer: Studies predict that point-of-sale installment payments over e-commerce channels will top a whopping $680 billion globally by 2025.
With this growth, we’re looking at widespread potential for credit degradation. Consumers are losing track of the BNPL accounts they have opened. Unlike a credit card where you can see and track your transactions, BNPL purchasers are now responsible for managing individual debts with each of these programs.
Consumers using BNPL products also neglect to factor these programs into payment timing and overall cash flow. For example, 38 percent report they have fallen behind on payments at least once. And almost three-quarters of people with a late payment say they have seen their credit scores drop. What’s more, 62 percent point to BNPL offerings as making them spend more: nearly half of those who participate in a BNPL program said they spent an additional 10 percent to 40 percent with these plans compared to when they use their credit cards.
Weighing the Pros and Cons of BNPL
These statistics raise some serious red flags. As trusted financial advisors, your customers look to you to help them navigate new financial solutions. You can serve a pivotal role, helping your customers better weigh the pros and cons of using BNPL solutions in three main ways:
Educate consumers about BNPL offerings. While competitive BNPL products exist for community banks, your primary focus for these solutions should be education. Helping customers better understand what BNPL means at pre-purchase, purchase, and post-purchase will go a long way toward shaping use of the service.
Highlight the protections offered with credit cards. Consumer Reports recommends customers use their credit cards instead of BNPL products, precisely because they offer greater protection. When faced with issues like product returns, defective products, or product disputes, the path to resolution with BNPL is murky. Remind your customers that with a credit card, resolution is rapid.
Emphasize credit card rewards. Credit card reward programs can offer attractive benefits not met by BNPL products. Remind your customers of the additional value they gain with their cards. (See our credit card rewards programs white paper for a deeper dive.) Don’t forget to call out that by effectively using credit cards, your customers also are building their credit standing.
An educated customer is a happy and more successful customer. While the rise of BNPL solutions is certainly noteworthy and worth watching, many community bank offerings may prove to be more favorable for customers. Keeping that message front and center will help your customers in making strategic financial decisions that address their short-term needs and long-term financial goals.
Tina Giorgio is ICBA Bancard president and CEO.