Those of you who follow fintech closely will be aware that, outside of the fantasy world of crypto and non-fungible goodies, the trendiest thing in town right now is “buy now pay later.”

Fintechs are never afraid to go above and beyond to disrupt the existing quo and reimagine products and ecosystems for BNPL consumers. By combining shopping carts, customer-facing applications, and self-serve functionality with checkouts, fintech APIs assist companies and banks in layering sales ecosystems around quick financing solutions. That is why fintech has emerged as the industry’s primary BNPL enabler.

BNPL increases the Average Order Value (AOV), decreases cart abandonment and increases conversion rates. Additionally, they benefit from a considerable merchant base, a high Gross Merchandise Value (GMV), and exclusive relationships. Merchants are unconcerned with the expense since they profit from the income generated.

Simpl, Lazypay and similar BNPL companies enable banks, fintech, and NBFCs to scale faster and more profitably by orchestrating an efficient plug-and-play BNPL ecosystem. BNPL Companies operates on a hybrid business strategy that caters to omnichannel credit demands with flexible no-cost EMIs, simple payback plans, and hassle-free checkouts that do not need credit card information. The user has to provide their registered cellphone number at checkout, and their available credit lines will be shown. BNPL companies enable the real-time expansion of lenders’ credit lines by linking businesses, new-age lenders, and consumers. Embed BNPL products into your checkout pages to enable smooth payments without requiring card credentials, PINs, or bank account information.

FinTech companies that provide purchase now pay later solutions to earn revenue through merchant fees and consumer late penalties. Even though their Merchant Discount Rate (MDR) is two to three times that of traditional credit card or debit card issuers, retailers are more than willing to pay the extra.

What accounts for BNPL’s popularity?

Pandemic fueled online shopping
Instant gratification across demographics
Plans of repayment that are affordable
Simple Know Your Customer (KYC) process, no outrageous costs

In India, the BNPL business is expected to expand at a 36 percent compound annual growth rate to reach $100 billion by 2023, reflecting the rising popularity of these lending platforms.

In today’s world, payments are a complicated, fragmented, multi-trillion-dollar sector that is now undergoing transformation. But there is a business model at the heart of it all, which is why we will dig into 6 Different Business Models that are used by the most profitable BNPL (Buy Now Pay Later) companies across the globe.

Integrated Shopping Apps

Integrated Shopping Apps are very popular in South-East Asian Countries including India, Singapore, Thailand, Indonesia, Philippines. Here the BNPL players create super apps (a centralized, one-stop app that enables consumers to shop at different virtual marketplaces without the hassle of signing in and out of various apps) with well-integrated shopping, payments, financing, and banking ecosystems on a single platform. The super app persuades low and high credit history customers to spend conveniently using BNPL. Hence merchants worldwide deploy this BNPL model even if it means cannibalizing their card portfolio. Even though the duration of financing is smaller in this model, receivables turnover is about eight to ten times a year, resulting in 30% to 35% Return on Assets (ROA).

The ride-hailing aggregator in India Ola saw the potential of BNPL and introduced Ola Postpaid, a service that enables users to pay later on more than 300 third-party websites.

Companies such as FlipkartPay and PayTM have also embraced this concept — from pre- through post-purchase, merchants connect with customers, offering credit alternatives and EMI conversion options for low-ticket transactions.

The model’s fundamental differentiators (described below) are unique and very difficult for traditional banks and other firms to imitate.

Solutions to engage customers throughout the purchasing process:

As per industry data on SuperApps, over 17% of users now begin their purchase journey in the super app. They sign up for the super app and then go to Amazon or other eCommerce applications to complete their transaction. As a result, there is more opportunity to engage customers throughout their purchasing process.

New income streams:

Super App firms monetize consumer interaction via loyalty and reward programmes, enticing offers and marketing campaigns, and innovative credit features integrated throughout the purchase experience. Additionally, they generate substantial cash from affiliate marketing and advertising.

Reduced customer acquisition costs:

BNPL-enabled checkout pages serve as low-cost customer acquisition channels. Because the majority of customers sign up for integrated shopping applications during the checkout process, businesses may profit from this area by cross-selling banking solutions, credit and debit cards. Aggregators such as Zomato, Swiggy, and Book My Show use cross-selling of third-party financial products to generate leads.

Advanced technical capabilities:

The integrated shopping applications’ technology stack is powerful and efficient at managing merchant underwriting, consumer fraud, payment intent, dispute mediation, checkouts, real-time invoicing, and customer care, among other functions. For instance, lenders demand extensive connections with order management systems in order to have access to SKU-level data for advanced underwriting. This kind of interconnectedness is very difficult for banks to accomplish.

Brand positioning

The integrated shopping applications approach enables lenders to portray themselves as an extension of the eCommerce brand, rather than just as a loan service provider. This stance is critical for merchants and BNPL service providers to develop.

Off-Card Financing Solutions

The off-card financing strategy is ideal for sectors such as electronics, furniture, and home goods, sports and home exercise equipment, and travel, with an annual growth rate of 80% to 100%. Affirm and Uplift are two companies that specialise in this kind of low-frequency purchase financing for mid- to high-ticket items that needs monthly instalment payments over an eight- to nine-month period.

Unlike integrated shopping applications, off-card financing solutions require users to pay a zero percent annual percentage rate for a certain time before being charged a subsidised annual percentage rate (APR). Over 80% of customers in this scenario have excellent credit ratings and access to adequate credit cards. However, they select BNPL for its lower lending rates. As a consequence, the off-card model cannibalises the number of credit card transactions processed by card issuers offering BNPL services.
When merchants’ margins and client acquisition expenses are under pressure and cart abandonment rates are as high as 90%, merchants opt for off-card financing options.

Digital Rent to Own Model

A Digital Rent-to-Own (DRTO) arrangement is one in which customers pay for products they intend to own. When all payments have been made, the purchase is considered complete. Over 78% of virtual rent-to-own use cases include household appliances, mattresses/furniture, and electronics, as well as other seized products.

The DRTO business, which is growing at a 30% to 35% compound annual growth rate, targets subprime consumers with a low credit score.

Credit-consciousness among millennials is a new trend. Between 2016 and 2018, credit awareness among self-monitoring Indian millennials increased by 58%, according to a TransUnion CIBIL survey. Additionally, it said that millennials are one of the most credit-conscious groups of the consumer market in the nation. They do frequent self-monitoring of their credit ratings and have an average CIBIL Score of 740.

While there aren’t stringent credit checks, super-fast approvals, low deposits, and flexible payment options, retailers do not offer customers lower APRs. However, major sellers often earn substantial discounts from DRTO participants under certain circumstances.

Among international players, Acima, Acceptance Now, and Progressive Leasing are all market leaders in the BNPL industry, using the DRTO concept. DRTO participants have an integrated in-store and digital presence and act as second or third level lending providers.

Card-linked instalments

Card-linked instalments are the most prevalent type of Point of Sale (POS) financing in Asia and Latin America, growing at a CAGR of 200 percent to 300 percent. It is essentially a no-cost EMI option (using credit cards) that enables high-ticket transactions above $1000 through subsidised merchant incentives. While card issuers in the United States, such as American Express Plan It and Citi Flex Pay, permit post-purchase instalment payments, their adoption rates are low in comparison to 0% APR BNPL payments at the time of purchase.

By the end of FY22, global card networks Visa and Mastercard want to deploy their respective Buy Now, Pay Later (BNPL) services in India. According to Mastercard, BNPL may result in a 45 percent boost in average revenues from current partnerships and a 35% decrease in cart abandonment. Visa and Mastercard are apparently seeking partners to establish systems that would enable retailers and online merchants to connect directly with banks and provide their consumers a variety of payment alternatives. At the moment, firms such as ZestMoney, Capital Float, PayU’s Lazypay, as well as Pine Labs and Paytm, provide this service.

Vertically-focused, higher-margin plays

The vertically oriented bigger ticket plays model is designed to finance high-value purchases ranging from $2000 to $50,000. They serve high-ticket sectors such as elective and non-elective healthcare, veterinary, power sports, and home remodelling, growing at a CAGR of 10% to 15%. CareCredit is a category specialty in healthcare, whereas GreenSky is a category specialist in home renovation.

Typically, high-value purchases occur in healthcare subcategories such as dentistry, dermatology, and cardiology. Additionally, high-ticket expenditures in home renovation occur in the areas of heating, ventilation, and air conditioning (HVAC), house remodelling, and solar panels. Category leaders in these areas collaborate with original equipment manufacturers (OEMs) to develop scale, manage margin pressure, and mitigate the effects of longer loan terms and tax credits.

Prior to entering this model, BNPL firms must thoroughly evaluate the subcategories and choose their go-to-market strategy and end-consumer connection. This model and category are ideal for banks looking to gain high-credit consumers and cross-sell mortgage refinancing and other banking services to existing customers.

SME Sales Finance

Companies such as CIT and Dell Financial Services offer point-of-sale (POS) financing to Small and Medium-sized Businesses (SMEs), which may be repaid in interest-free easy instalments. SME sales funding (if repaid before the prescribed period). This rapid credit, which is often done via off-card payments, allows small company owners to better manage their infrastructure expenditures through tailored financing and leasing.

They merely need to consolidate their spending management and implement the BNPL payment option into their payment ecosystem to complete the task at hand. In addition, since the money is for core business operations, lenders are able to have a comprehensive understanding of the borrower’s risk profile and repayment capabilities.

Concluding Thoughts

While startups have been at the forefront of BNPL adoption, incumbent banks have avoided entry out of concern for their lucrative credit card industry. Only lately has the complementary nature of credit cards and BNPL been recognised.

Banks are using BNPL to attract new customers who have traditionally shunned credit cards. Pine Labs, like ICICI Bank, provides retail consumers pay-later options in-store. This allows purchasers to pay for large purchases in monthly instalments (EMI). It streamlines the credit application process and provides a no-cost credit option.

Flexipay, a 15-day no-interest credit with a maximum credit limit of INR 60K, was launched by HDFC Bank in 2018. The bank partnered with brands like as Myntra, Bata, MakeMyTrip, Curefit, Lakme Salon, and Urban Ladder.

As we can see, the many rivals in the field will pursue tactics that are distinct from one another, which will have a negative impact on the overall innovation of business models in the industry as a whole. The expansion of the merchant pool and expansion of the TAM (Total Addressable Market) are both facilitated by raising the restrictions, but the dangers are also increased. If a more aggressive approach is rewarded with more consumers and market share in the near term, the concern is how the resulting defaults will manifest themselves in the long run.