Where Microloans and Open Banking Meet
Digital technology and integrations between banks, fintechs and retailers are changing not just how but also when payments are made. As a result, the way consumers pay for their purchases includes an increasingly popular option called buy now, pay later (BNPL).
Taking a loan for a purchase as small as $35, which is essentially what BNPL is, would never have been considered in the past. It would have been far too burdensome for consumers and lenders. But thanks to the prevalence of application programming interfaces (APIs) in the financial industry, the process is now as simple and seamless as a credit or debit card transaction.
Almost all major stores and retail sites now offer customers the option to pay with a BNPL. Players in this space already include Swedish fintech Klarna, as well as US companies Sezzle and Affirm. The name behind many store credit cards, Synchrony, also has its offering, and now even bank-branded credit cards like Citi and Chase, as well as Amex, are offering their customers the option of using BNPL.
The space is heating up even more with Apple’s announcement that it will be offering its own BNPL called Apple Pay Later through a subsidiary of the company that has secured loan licenses.
BNPL usage has skyrocketed to $100 billion in retail purchases in 2021 from $24 billion in 2020, as reported by the Fintech Times. Forecasts for the market indicate that the trend is here to stay. The global market for BNPL is expected to reach $3.98 trillion by 2030 with a CAGR of over 45%, starting in 2021, according to Allied Market Research.
As we have seen in The Future of Fintech: AI and Digital Assets in Financial Institutions, fintechs enable consumers to access credit and borrow on demand. The BNPL option is an iteration of this, a microcredit that customers access at checkout through financial services in partnership with the retailer.
Apple and APIs
A is for Apple and APIs, which enable the integrations that make BNPL possible
Apple Pay Later will be an option for shoppers to repay what was spent through Apple Pay in four equal installments spread over six weeks. What’s unusual about Apple’s move, as The Wall Street Journal reports, is that technology companies that traditionally offer financial products have partnered with financial institutions to manage lending risk. But Apple is confident it can handle it on its own because it has so much data at its disposal. (Also read: Behavioral Economics: How Apple Dominates Big Data.)
Like banks, Apple intends to use resources like FICO scores and credit scores to assess potential borrowers. However, it has an added advantage in risk management, reports the Journal: “its giant store of Apple ID data for identity verification and fraud prevention.”
Apple also reduces its risk by limiting the loan amount to $1,000 per person and lowering that maximum based on individual score. Not relying on borrowers’ memory to make payments when due, it implemented an automatic opt-in for installment payments by requiring users to link the BNPL service to their debit cards.
While Apple takes on the burden of credit decisions itself, it still relies on partnerships for some of the aspects of a successful BNPL program. Goldman Sachs, which issues the Apple Card, also serves as the loan issuer and official sponsor of BIN,” CNBC reports. For supplier interaction, it relies on Mastercard’s white-label BNPL product called Mastercard Installments.
These functional partnerships are only possible now, thanks to the advancement of API integrations. Fintech Times explains that the rise of “soft loans” is not just due to new shopping behaviors adopted during the pandemic, but to the availability of enabling technology at the right time: “BNPL products have thrived in large part because of to the APIs that make up their literal core. .”
APIs are the digital equivalent of Velcro, connecting businesses through partnerships that allow data and payment options to flow seamlessly. They are what allow fintechs to operate, and now they allow retailers to effectively become the conduit for microloans offered through BNPL options.
The bank evolves
B is for banks that have adapted and evolved
Today’s banks have come a long way from the stuffy, slow institutions of the last century. At the time, all banking information was paper-bound, and transactions involved paper trails in the form of bank books, mortgage coupons, and carbon copies of credit card payment statements and deposit slips.
The paper trail must have ceased when digitization took hold and expectations for faster processes became the norm. Not only has tracking traditional bank accounts become easier, but financial institutions have expanded their adoption of digital capabilities to provide their digital native customers with more ways to borrow and pay. (Also read: Top 12 Use Cases: AI in FinTech.)
As noted in McKinsey’s Global Banking 2021 Annual Review, today’s banks are learning from the successes of companies like Amazon and Netflix that “took existing services and transformed them into digital experiences that are now integrated into customers’ daily lives.
This is largely the result of open banking, a standard imposed on financial institutions from regulations that first emerged in Europe and the UK to allow third parties to access data via APIs. Such integrations enable new financial solutions that can better serve banking customers, stimulate new areas of business and improve efficiency. The industry has embraced options to such an extent that there are now thousands of APIs used in the financial industry.
While loans used to be formal transactions that people only undertook for major expenses like home renovations, they are now simply incorporated into day-to-day activities by people who opt for BNPL options at checkout. Banks that do this can win more BNPL business than the startups that popularized it. PYMNTS found that most people interested in using it expressed a preference for the BNPL plans of the banks they already entrusted with their money.
Alternatives to credit cards
This is for customers requesting alternatives to credit cards
Offering customers ways to pay a little at a time for their purchase is not a new concept. But in the past, purchases were not made on credit but by layaway. Today, major retailers like Walmart have abandoned their layaway programs and embraced BNPL instead.
Retail TouchPoints cited a Software Advice report which found that of 700 retailers surveyed, 91% have or are in the process of implementing a BNPL offering for customers. They don’t just use it for luxury items. According to Adobe, the top three categories of BNPL usage in e-commerce are apparel, electronics, and groceries.
BNPL’s tremendous growth is largely due to its adoption by young consumers. Over 60% of consumers under the age of 44 used the service in March 2021, and for the 18-24 age bracket, adoption increased from 37.71% in 2020 to 61.16% in 2021 , according to an Ascent survey.
It’s no surprise that the age group that likely includes college students is embracing a form of payment that offers the convenience of a credit card without the cost of interest payments as long as regular installments are made. The same demographic is very likely to use an Apple phone for payments, which is why it makes perfect sense for Apple to enter this space now.
What awaits us
I have no doubt that we will hear announcements of similar offers from competing companies in the future. Given the huge upward trajectory it has already demonstrated, the BNPL bandwagon is one that customers, retailers and lending providers are eager to follow.