Oct 29, 2021

Tracking retail’s buy now, pay later revolution

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Buy now, pay later (otherwise known as BNPL) is a type of financing arrangement that allows consumers to purchase items first and pay for them later, often with no interest involved. BNPL has become especially popular in the wake of e-commerce’s rising popularity, with over a quarter of millennial US shoppers using BNPL for their e-commerce purchases. Use of BNPL is even greater on holidays that encourage greater spending, such as Black Friday or Christmas. 

But BNPL did not start out in the US or even in North America. In fact, BNPL’s roots can be traced to the South American nation of Brazil.

BNPL’s humble beginnings

Immense inflation plagued Brazil and its consumers for decades. By the 1980s, inflation reached more than 6000% and people spent their money as soon as they got it, while shopkeepers were wary of extending any credit. 

Yet inflation math soon came into play. Merchants realised that by letting consumers spread the payment for an item over multiple instalments, any credit would be paid off with highly inflated future money. This scheme would also lead to fewer abandonments at checkout. 

Eventually, the credit economy evolved from Brazil’s high inflation roots. Even when inflation declined in later years, instalments remained a dominant feature of the market. Today 60% of the purchases in Brazil are made with credit cards and more than 50% of those transactions are made in instalments. 

With credit cards, there was a formalised method of splitting payments over 4–12 months. BNPL isn’t just reserved for big-ticket items either: with the average Brazilian salary a little over just $500 USD, BNPL applies even to smaller trinkets like toys and accessories.

Helping along BNPL’s popularity was the emergence of alternative credit sources. Local providers such as Xerpa, Fácio, Minu, and ePesos provide earned wage advance following the payroll loan model and bring ordinary people closer to financial freedom. 

BNPL evolved

A crucial part of BNPL’s continuing popularity is its ability to evolve alongside new technology. Not only did emerging BNPL companies pitch themselves as an alternative to tedious credit fees and revolving credit lines, but they also emphasised how they provide an easy online shopping experience. 

BNPL-focused businesses make it easier for Brazil’s many unbanked consumers to buy online. With BNPL, Brazilians no longer have to deal with wonky wire transfers or voucher systems handled by local convenience stores. It’s no surprise then that e-commerce companies such as PagSeguro have elected to work closer with BNPL firms like Boletoflex by buying a stake in the firm. 

BNPL is here to stay

While pay-later financing is still a fraction of the credit card industry, the global BNPL industry is expected to grow 10-15x its current volume by 2025. 

BNPL’s rise is a logical addition to the sea changes facing the world of finance and credit. In fact, a big part of the reason why BNPL has gained so much traction is because of the rise of alternative credit scoring. By using a credit scoring app to check their real-time credit score, BNPL consumers can immediately see if their purchases are impacting their finances. For financial institutions and BNPL companies, the emergence of digital credit scoring is a great help for credit risk management. Now more than ever, it’s easy to keep repayment terms clear and transparent, while also helping consumers keep away from the debt trap. As pointed out in our ebook here, BNPL is in a prime position to help people improve their credit. 

The bottom line

From its small beginnings among Brazilian merchants, BNPL has greatly changed the way consumers interact with retail—and still continues to do so, with no signs of stopping. 

With e-commerce expanding and establishing itself as a key part of the retail industry, it will be interesting to see how else the BNPL model evolves. In the meantime, retailers may soon find that incorporating BNPL schemes into their payment options is no longer just a competitive advantage—it’s an absolute necessity.