Five winning retailer strategies for Buy Now Pay Later

By Alessandro Hatami founder of Pacemakers.io and Leon Gauhman founder of Elsewhen
Alessandro Hatami founder of Pacemakers.io and Leon Gauhman founder of Elsewhen on how retailers can reclaim consumer finance at the point of sale

Buy now, pay later (BNPL) is arguably the biggest shake-up in consumer finance since the launch of credit cards.  A new report forecasts that BNPL will account for $438 billion (5.3%) of global e-commerce transactions by 2025, up from 2.9% in 2021, as it becomes the fastest-growing e-commerce payment method in markets including the US, UK, Brazil and India.

On the surface, this is welcome news for retailers that rely on providers such as Affirm, Afterpay, Klarna and PayPal Credit to persuade consumers to keep spending as the cost of living crisis bites. But there are also dangers for brands that become over-reliant on the model's easy allure.

Despite the buoyant forecasts, Klarna recently announced 10% job cuts amid fears that the next funding round could see its £46bn valuation slashed by one third. Klarna attributed the job cuts to factors including the Ukraine war, inflation and a possible recession. 

Meanwhile, regulators worldwide are starting to scrutinise leading BNPL players, and retailer brands could get caught up in any subsequent blowback.As of June, Klarna has started sharing customer borrowing information data with credit agencies before being formally compelled to by the regulators. With consumer credit ratings likely to be impacted in the next 12-18 months, Klarna’s move may lead to less uptake by consumers.

Apple launches own brand BNPL product – a sign of things to come?

So what does this mean for retailers considering whether or not to move ahead with BNPL? Apple recently announced the launch of its own brand no interest/no fees BNPL product. The move represents a very bold move by Apple to fulfil its goal of delivering the best possible customer experience.

Following Apple’s example, other firms are likely to strip back their reliance on external providers to build their own customised embedded finance alternative. 

Business Chief talks to two Fintech experts Leon Gauhman, chief strategy officer and co-founder at digital transformation consultancy Elsewhen and Alessandro Hatami, managing director of strategic consultancy Pacemakers, about winning strategies retailers can adopt. 

Say no to one-size-fits-all

“BNPL has strong consumer and merchant appeal because it offers a friction-free, apparently affordable payment option,” says Elsewhen’s Leon Gauhman. “To differentiate in a crowded market, retailers should look to develop a seamlessly embedded finance offer tailored to their specific brand values and the needs of their customers. For example, Hamburg Football Club (HSV) partnered with ComDirect Bank to offer fans a current account including credit and debit cards, a “payment” bracelet and various promotions and discounts such as TV subscriptions to watch games.”

Deploy brand equity to simplify customers’ financial needs

“Its current problems aside, Klarna has developed an aspirational brand out of payment which is a dull but necessary task,” says Pacemaker’s Alessandro Hatami. “Retailers can reverse engineer this approach. Imagine banking with Zara or Dior, not just buying products from them.” “Understanding your customers' financial needs in the context of your brand is key,” adds Gauhman. “As part of their experience of your brand, do customers need to insure, borrow, save or pay? Could your brand help streamline these tasks?”

Outside retail, brands are already adopting this approach: Mercedes for example has a “Fuel & Pay” payment platform that enables drivers to buy and pay for fuel via a Mercedes app or through their vehicle’s infotainment system. In addition, most US airlines offer forms of BNPL and in the EU Lufthansa and TAP are already doing so. “These brands simplify things for the customer, allowing them to enjoy what the brand allows them to do - be it to drive or fly,” says Hatami. 

Ensure embedded finance reflects your brand’s values and purpose

Beyond regulatory issues and cheap credit concerns, Gauhman believes that the risk for retailers relying on payment providers like Klarna is that BNPL brands are likely to be focused on goals that could be out of sync with brand-based customer needs. “Ethical brands might favour goals such as longer-term loyalty or a more measured attitude to consumption that embraces ESG values,” he says. “Take Patagonia which currently gives 10% of its profits to small-scale environmental campaigns. It could apply a similar mindset to the way it structures any embedded finance offer to customers. Cashback, discounts or slightly reduced interest rates for ethical purchasing are all tools that e-commerce platforms or retailers could deploy.”

Embrace the new-gen power of tech

In the UK, Tesco and Sainsbury’s were retail pioneers in the finance space however Hatami believes their offers are outdated. “Today, myriad fintechs offer agile and composable solutions like Banking As A Service (BaaS),” he says. “These solutions make it easy and cost-efficient for brands to launch more innovative and inspiring embedded finance products. For example, Walmart recently launched a fintech startup with investment firm Ribbit Capital, with the ultimate goal of developing financial “experiences” for its employees and customers. Ikea parent Inkga, meanwhile, has recently taken a stake in BNPL firm Jifiti. Coupled with Ingka/Ikea’s previous investment in Ikano Bank, the company is now well placed to deliver “competitive and accessible financial services” to customers.”

Embed finance in your customer experience

Whichever embedded finance option brands decide to adopt, both Hatami and Gauhman emphasise that ensuring first-rate customer experience is key. “Ride-sharing apps like Uber and Lyft are great examples of what “good” looks like in terms of customer experience around embedded finance,” says Gauhman. “These brands make paying for journeys simple and seamless, but they also offer financial services to their drivers (e.g. Lyft's debit card and bank account).”  Hatami believes that the potential for embedded finance goes way beyond BNPL into areas like credit/debit cards and mortgages – perhaps even pensions. “Travel industry brands, including Airbnb, Ryanair and Trainline have all realised that travel insurance is an easy sell when someone is at the point of purchase – but there are many retailer scenarios where this logic can be applied.”

A win-win blueprint

Embracing embedded finance requires careful consideration about engaging with customers and communities in a way that reaches beyond just financial transactions. That said, Hatami says retailers wanting to go ahead shouldn’t delay. “Recent research from BaaS provider Vodeno revealed that 34% of retailers are planning to increase their embedded finance offering in the next 12 months, while 22% aim to dip their toe in the water for the first time. So there's a real risk of being outflanked by rivals”.

Done well, Gauhman maintains that embedded finance should intuitively fit into brands’ existing playbooks on customer retention and engagement. “The big opportunity is to make embedded payments/lending/insuring part of a genuinely customer-first experience,” he says. “In the process, retailers can distance themselves from consumer debt criticisms that could be magnified by the cost of living crisis.” In other words – beyond the glamour and buzz of BNPL – retail-own finance could be a powerful path forward, one that's hiding in plain sight.

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