The BNPL Explosion and Digital Revolving Credit

There was much hype in the media about buy now pay later (BNPL) solutions in 2021. It’s little wonder that BNPL has gained prominence. Fueled by the COVID-19 pandemic, ecommerce transactions as a percentage of total retail sales grew rapidly in 2021, and an estimated 20% of U.S. adults have used BNPL in the past year.

The first generation of BNPL solutions that became available on the market provided installment loans, and this is still the more common BNPL offering. With this type of financing, a consumer applies once for a short-term loan to finance a single transaction over a fixed number of installments. This provides limited benefit to those who buy and market goods and services, especially merchants whose products lend themselves to recurring or subscription purchases (e.g., cosmetics, pet supplies, auto accessories, etc.). When this loan elapses, the financing closes with it. Consumers must apply for a new installment loan every time they make a purchase.

The Rise of Digital Revolving Credit

In 2022, a new category of ecommerce financing will gain prominence in the BNPL space to address this popular buying category: Recurring purchases. Digital revolving credit offers far greater benefits for merchants, enabling them to leverage predictable revenue streams and create loyal, long-term customers. It refers to an account that the consumer can open and then reuse over and over, as opposed to paying off a single purchase on a short-term installment schedule and terminating the loan. It therefore lends itself to these recurring, subscription-based purchases.

Digital revolving credit will usher in a more merchant-focused era of ecommerce payments in the BNPL space. Merchant benefits include the opportunity to foster better brand loyalty and increased customer lifetime value (CLV). An ongoing, open line of credit is a far more merchant-friendly construct than installment loans offer.

This more flexible “lifecycle credit” approach will gain traction, allowing consumers to open a reusable line of credit with a merchant. It can be maintained long term, tapped again and again within a network of approved merchants. The repayment schedule is flexible over as many months as a customer prefers, as opposed to a fixed installment loan which generally needs to be paid in four months. This could better be described as “buy often, pay much later” as opposed to the more finite “buy now, pay later.”

In addition, a closed-loop digital credit platform operates outside the traditional credit card “rails.” A history of all customer purchases across all merchants in the network is maintained within the system. This facilitates cross-merchant marketing, whereby products from other complementary merchants can be marketed to shoppers.

Benefits to Merchants and Consumers

This is not only convenient for consumers but beneficial to merchants, since the credit provider can maintain a long-term relationship with that customer vs. one-and-done BNPL transactions. In addition to boosting loyalty, it also reduces acquisition costs. A digital revolving credit model has shown to be the more stable business option, since customers who maintain long-term associations with their payment providers have more incentive to remain in good standing, so they tend to default less.

A recent informal poll of ecommerce systems integrators conducted by FuturePay found that about 40% of their merchant clients have already implemented a BNPL solution. This indicates a healthy remaining market opportunity for BNPL. Merchants that haven’t yet implemented a BNPL option (and even those that have) will want to consider the distinctions between installment BNPL loan providers and digital revolving credit solutions, since the differentiators have a direct bearing on the alignment of the financing solution with their long-term goals.

Since installment loan BNPL providers only offer short-term loans, they’re typically less discerning about buyers’ credit status, which has recently led to increased regulatory scrutiny. In contrast, revolving credit involves an ongoing customer relationship. As a result, only qualified consumers with viable credit profiles are accepted. And with today’s sophisticated credit underwriting technology, these applicants can be approved in seconds.

When consumers have an incentive to reuse their credit line and establish a long-term relationship with the provider, it increases CLV. Considering it takes far more resources to acquire a new customer than to nurture an ongoing one, this is a significant metric. Digital revolving credit’s more merchant-friendly approach, compared with installment-based BNPL loans, will lead to increased adoption in 2022 and beyond.

Tim Harris is CEO of FuturePay Holdings Inc.