What does Big Tech breaking into BNPL mean for banks?

Buy Now Pay Later (BNPL) isn’t delaying its growth. Apple recently launched its awaited ‘Apple Pay Later’ feature in the US, allowing users to split purchases into four payments over six weeks, with no interest and no fees. This is not the first move Big Tech has moved into the BNPL space. BNPL companies like Afterpay already have partnerships with Google and Apple; Amazon also teamed up with Barclays and Citi to let customers pay in instalments.

BNPL user figures are staggeringly high. In 2022, there were 360 million global users, with this figure predicted to exceed 900 million by 2027. Big Tech breaking further into BNPL both helps fuel growth and underlines the attractiveness of the sector.

The value of BNPL

BNPL is an enticing concept - to businesses as well as consumers. Let’s start with consumers. Through split-up payments, customers are given more flexibility and control over their finances, also helping them avoid bank overdraft fees. As many BNPL firms don’t carry out strict credit checks, this method can also be seen as a more inclusive form of finance. These advantages are especially important in a cost of living crisis, although there are concerns that customers could overextend themselves and take on more payments than they can afford.

Then there’s the value to businesses. Our research, published last year in partnership with Deloitte, found that 41% of consumers say they are more likely to shop at stores that offer BNPL. Research from RBC Capital Markets also found increases of 30-50 percent in average order value and a 20-30 percent improvement in sales conversion when BNPL is offered. Another consideration with BNPL is its impact on customer retention. AeroMexico, which uses travel BNPL provider Uplift, found that customers using BNPL are 25% more likely to return to make another purchase with them. In a time of increased business costs, economic uncertainty and consumer plans to cut down spending, this form of short-term financing may be a wise choice for merchants.

What Apple’s move means for the sector

Apple Pay Later’s launch signals a decisive move from Big Tech, and other key players are likely to be galvanised into further action as BNPL interest surges. The strength of Apple’s brand could be expected to encourage new BNPL users too, transferring the trust associated with the company to this new form of finance. There’s huge growth potential here: as of last August, almost 75% of iPhone users in the US had activated Apple Pay.

We could also expect Apple’s action to precipitate or expediate greater regulation. The lack of controls across BNPL has long been a concern with tighter restrictions called for: Apple Pay’s arrival and subsequent surge in BNPL interest could hasten change. In the UK, the process of introducing regulation is already underway with the government issuing draft legislation and launching a public consultation in February.

The future of BNPL

The future of BNPL may be more tightly regulated, but it’s set to be brighter too. The younger Gen Z and Millennial generations are leading adoption, yet there’s recently been increased appetite among older consumers. At Klarna, the fastest-growing age group is now over 58 years old. With such cross-demographic growth and high interest among the younger generations, BNPL is set to become a key form of payment that will stand equal to - or even outweigh - traditional payment forms for many. Combined with Big Tech’s BNPL moves and the legitimising structure of new legislation, it seems that soon we’ll always have the option to split up transactions.

This means banks and businesses need to get serious about BNPL. Consumer appetite is there suggests research from PYMNTS, which shows that 70% of current BNPL users would be interested in using BNPL plans from their banks if such offerings were available. As the market for this type of financing soars, incumbent banks who refuse to adapt risk getting left behind and losing customers to more innovative players. On the bright side, banks are in a better position than fintechs in a market facing more regulation, lower margins and potential market consolidation. BNPL may be a way to improve merchant relationships and strengthen value propositions.

As seen, for businesses, adopting BNPL is a way to increase conversions and order value and boost revenue retention. With Big Tech firms drawing their users towards BNPL, short-term financing options are becoming central to the shopping experience. Businesses that cause friction here face customers turning to competitors who can give them the convenience and flexibility they desire.

Apple’s launch throws down the BNPL gauntlet and challenges other tech firms, financial players and businesses to develop their own short-term financing strategies. BNPL is becoming fundamental to finance - not a flash in the pan - and it’s time for all businesses to sit up and take note.