With consumers continuing to spend despite the economic downturn, how will credit at the point-of-sale change high-value transactions?
Despite reports that the use of buy now, pay later (BNPL) is beginning to slow, new research reveals consumers are continuing to access credit at the point of purchase.
According to Barclays Bank and debt management charity StepChange, the average BNPL user was paying off 4.8 purchases in June 2022 – almost double the estimate in a similar study conducted in February (2.6 purchases per customer).
While this type of credit has so far been associated with low-cost retail purchases, it is becoming popular for high-cost expenditures such as car repair or holidays. Familiarity with BNPL – it’s estimated 17 million Britons have used such services – means that other industries are now offering the payment option at checkout.
“The rise of BNPL as a preferred payment method will lead to more non-retail businesses touting it as an option at checkout,” says Amy Gavin, lead competitor strategist at fintech consultancy 11:FS.
Travel and hospitality in particular have seen adoption levels increase. National Express recently announced a partnership with Clearpay, while Booking.com and Hotels.com now offer Klarna at checkout.
The rise of BNPL as consumers’ preferred payment method will lead to more non-retail businesses touting it as an option at checkout
This could partly be due to the effect of the pandemic on consumer priorities. Even with a bleak economic outlook, interest in travelling remains strong. A study by travel technology firm Amadeus revealed that travel was the highest priority for consumers’ discretionary spending over the next 12 months. Some 42% of respondents listed foreign travel as a high priority, with a further 32% expressing interest in domestic holidays, eclipsing eating out, home improvements or big-ticket items such as a new car. Three-quarters of those who took part in the survey were open to using BNPL to fund their holidays.
“The travel industry has a strong use case for BNPL and providers have quickly latched on to it to increase conversion rates and average spend per customer,” says Gavin. “Particularly as the current squeeze on disposable incomes is likely to restrict customers’ ability to pay upfront for high-value trips.”
While there has recently been an increase in adoption over the past 12 months, BNPL for travel is not a wholly new phenomenon. AeroMexico uses specialist travel BNPL provider Uplift’s services at checkout. Customers have the option to purchase with no upfront cost, and then select a repayment plan for up to 12 months.
“Implementing BNPL was part of our payments evolution, to offer our customers more comprehensive payment options,” says Daniel Reyes Vega, director of digital solutions at AeroMexico. “When we started conversations, five years ago, very few merchants in retail or any other industry were offering this product.”
Reyes Vega reports that revenue generated through Uplift has more than doubled in 2022 and customers using BNPL are 25% more likely to return. “We view Uplift as not just a payment option but as a marketing and revenue-generating tool. We partner in campaigns and use up-funnel marketing to reach our customers more effectively,” he says. Later this year, AeroMexico will implement a 0% APR offer and a ‘fly now, pay later Estimator tool’ through Uplift. Reyes Vega believes this will allow sales to “grow despite the current economic situation”.
The impact of recession on shopping habits
Even with such offers, the likelihood of a global recession means many will have to reprioritise spending. With budgets tightening, sudden and unseen expenditures become more damaging to finances, leading to consumers accessing BNPL services for transactions such as house or car repairs.
“My bet is that the impending recession will lead to an increased reliance on BNPL among consumers generally, potentially more so for certain non-retail purchases,” says Gavin. “It’s a relatively easy choice for someone to avoid taking on debt to buy a pair of trainers, but not so easy to avoid funding necessities like car repairs or medical care when you don’t have the money readily available.”
Boiler and air-conditioning supplier Boxt offers various credit options at checkout through the white-label checkout solution Divido. Its interest-free offering, available to repay over 12 to 24 months, has doubled in popularity since it started in 2017 and accounts for 40% of total business.
“This growth was driven partly by the impacts of the pandemic in terms of financial strain and attitudinal changes towards BNPL and partly by our interest-free plans launched in that year,” says Andy Kerr, Boxt founder and CEO.
The impending recession will lead to an increased reliance on BNPL among consumers for certain non-retail purchases
Unsurprisingly, Boxt anticipates customers will need help with all aspects of their energy costs over the next few years. While they are exploring other options to help customers with rising costs, interest-free credit will be an integral part of the offering.
“Given the energy crisis, cost-of-living pressures and generally gloomy economic outlook, we expect the proportion of our customers choosing to spread payments with a flexible finance plan will grow over the next couple of years. Offering credit for big-ticket items will be important,” says Kerr.
What does funding these transactions mean for the BNPL companies? As Gavin points out, these lenders have not had to closely vet customers, as spend is often relatively small.
“BNPL companies typically don’t perform rigorous credit checks, meaning significant credit risk for businesses lending money to people who might not be able to repay it,” she says.
But some players in the space are beginning to change their processes, ahead of greater regulation expected to be introduced in 2024.
“BNPL companies are changing the way they work from a risk perspective, as seen by Klarna’s recent move to start reporting transactions to credit-reference agencies. Laybuy already shares its payment data with Experian, which means that transactions appear on customers’ credit files,” explains Gavin.
“This is designed to improve the accuracy of customers’ credit scores and help lenders make more informed decisions about offering credit.”
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With consumers continuing to spend despite the economic downturn, how will credit at the point-of-sale change high-value transactions?
Despite reports that the use of buy now, pay later (BNPL) is beginning to slow, new research reveals consumers are continuing to access credit at the point of purchase.
According to Barclays Bank and debt management charity StepChange, the average BNPL user was paying off 4.8 purchases in June 2022 – almost double the estimate in a similar study conducted in February (2.6 purchases per customer).
