BNPL = Extended Payment Terms 2.0

“A key characteristic of the recent fintech revolution is its depth… Only innovations of greater depth have the ability to transform financial services because they generate structures on which new products and services can be build.” 

Eswar S. Prasad, The Future of Money: How Digital Revolution is Transforming Currencies and Finance 

In his new book, Cornell University economics professor Eswar S. Prasad devotes a chapter to assessing if fintech its numerous forms, including payments, will make the world a better place. Prasad launches his inquiry by differentiating between iterative improvements and genuine transformation. The distinction helps shed light on the recent surge buy now pay later (BNPL) offerings, their applicability to B2B payments, and how BNPL may soon evolve.  

Paper is a great example of an early fintech breakthrough, Prasad notes. Paper currency replaced the limited supplies of heavy metal coins merchants hauled around in 7^th century China, greatly increasing their efficiency and boosting trade. While BNPL’s rapidly growing use over the past two years may make it seem as transformative as the shift from metal coins to paper money, I view BNPL as a digital extension of the payment terms sellers have long extend to buyers.  

To date, the vast majority of BNPL activity has occurred in the B2C space. BNPL options let consumers pay for an offering in installments over time, rather than paying the full amount at the time of the purchase. While this isn’t a novel concept, the efficient integration of the payment-installment option (and the related credit approval) into B2C e-commerce transactions – in which a BNPL vendor approves or rejects a buyer’s application in real-time or close to it – is new. A leading B2C BNPL firm saw its revenues soar when a retailing giant invited the BNPL provider into its digital payments process (after the retailer endured high decline rates on its own branded credit card). 

Installments appeal to consumers on a psychological level: many prefer to pay $250 four times over or 12 months vs. $1,000 at checkout. The retailers who have embraced BNPL value the access to a new pool of customers (and additional revenue) who would not have qualified for a credit card. That additional revenue has so far proven to be worth the significantly higher fees (vs. credit card fees) that BNPL firms charge to take on a higher risk of nonpayment. Less visible, yet also crucial, is the seamless manner in which the BNPL option has been integrated into the eCommerce B2C transaction in the form of a pay button. 

This combination of improvements to the existing B2C payments structure has proven wildly successful over a short period of time. Fintech research firm Kaleido Intelligence reports that BNPL transaction values soared 292% from 2018 to 2020; and it forecasts BNPL transactions to continue to grow at a 27% compound annual growth rate through 2025, when they are projected to total $258 billion in global eCommerce spending. 

Impressive? You bet. As to whether BNPL is a transformative structure on which new products and services can be built? Well, that’s another matter, and one that depends in larger part on how easily and lucratively BNPL might cross over to B2B transactions.