As the popularity of buy now, pay later (BNPL) continues to grow, the industry is getting a clearer glimpse into the spectrum of users who turn to it for purchases, including an unexpectedly wide — and growing — number of customers who have other credit options but prefer BNPL anyway.
PYMNTS research finds that financially stable consumers with access to revolving credit choose BNPL options more frequently. It may have something to do with the fact that these credit-worthy consumers understand money — and that BNPL is essentially a free loan.
In a new episode of PYMNTS TV’s “On the Agenda,” Karen Webster was joined by Sezzle President Paul Paradis, Bear Mattress CEO Scott Paladini, and Echelon Fitness CEO Lou Lentine, exploring how merchants can use BNPL to capture sales from financially “worry-free” consumers.
Selling luxury beds that can run up to $3,000, Paladini said, “I think [consumers] recognize that 0% interest is basically free money. I’m curious to see how it changes as interest rates rise, but in the current environment it makes financial sense to take advantage” of BNPL financing.
Paradis said, “It differs depending on short term and long term or the ticket size of the purchase, as well as the terms of financing, but I think Scott’s ‘free money’ argument is a good one.”
That financially savvy, credit-worthy, card-carrying consumers are getting wise to zero-interest installments adds a new dimension to BNPL, which in 2021 represented just 3% of retail spend.
For connected home fitness marketplace and Peloton rival Echelon, Lentine said, “We convert about 40% to 50% using [BNPL] financing. At one point we [took BNPL] down and we did see a lower conversion, so it’s definitely important.”
BNPL conversions for Bear Mattress are “around 30%” using multiple providers, Paladini said. Clearly, those who could pay for high-ticket items with credit cards are instead choosing installments more frequently, where they find it offered. They have their reasons.
PYMNTS research finds that among worry-free consumers who have not had a credit card during the past year, 40% avoid cards because they tempt spending; 35% eschew cards due to high-interest rates, and 25% say fees are too high to apply — even though they qualify.
Get the study: The New Credit Model: Why Financially Worry-Free Consumers Still Want Alternatives To Traditional Credit
Matters of Choice
As the field becomes more crowded with players, some are choosing to blaze their own BNPL trail with in-house tech and terms crafted to the particulars of a given business or vertical.
Lentine said “We did our own, Echelon Financing, we partnered with a bank for it, and we can give 0% interest up to 48 months. Unlike our competitors, we also can finance the membership as well with it. That’s a good benefit, and not all finance companies will do that.”
Offering multiple BNPL options “confused the customer and our conversion rate actually wasn’t as good as just offering one,” for the company’s connected bikes and workout gear, Lentine added. A typical Echelon transaction runs $1,300, and he said the company would consider a second BNPL option for lower-priced items like athletic wear “where it’s a $60 average checkout.”
Infrequent large purchases like mattresses and connected exercycles need a different approach to underwriting than fashion, for example, which supports the argument for more choice.
Paradis said “When you’re dealing with a higher frequency of purchases, people are going to want to go to the default payment method that they use every day or every week. I do think it’s going to move to a scenario where retailers need to offer multiple buy now, pay later solutions, just like they [accept] multiple credit card types.”
“My family’s been in the retail mattress business for 30 years,” Paladini added, “and this comes back to what Lou was talking about with 48 months. You can go into some mattress stores and get 84-month financing at 0% interest right now. But the customer profile tends to be strong.”
“Strong” is an apt descriptor for the “worry-free” BNPL consumer, who, according to PYMNTS research, is 52 years old, has a 768 credit score on average and earns more than $50,000 a year.
Read more: BNPL User Personas Proving That Installments Have Value Beyond Instant Gratification
Ubiquity and the Future
As BNPL expands into pricier merchandise and longer payment terms, merchants are eager to get the optionality balance right. That’s a test-and-learn exercise to some extent, as different types of merchants analyze BNPL usage over time to see where the best action is.
With BNPL known to improve everything from cart size and customer experience and loyalty, Echelon’s Lentine is focusing efforts on prequalifying more “worry-free” users to spur usage.
“When you do work with third parties,” Lentine said, “you’re kind of at their whim if they approve or decline and if that doesn’t happen, we don’t really know why or how we can help that customer.”
Paradis agreed, saying “What we’re working toward as an industry, and as an individual provider at Sezzle, is how can [we] allow consumers to use us everywhere, not just the merchants that we have a direct relationship with?”
Once that’s solved, Paradis expects more convergence between BNPL and more traditional credit cards and other financial offerings — offering consumers “pay now” as a feature, perhaps, or letting them refinance onto longer-term installment loans.
“We see those customers that have good financial strength still buying [with BNPL],” Paladini said. “What it does do is provide them with all the flexibility in the world to decide how they want to pay, when they want to pay, etc. When you’re in good financial standing, that gives you a whole lot of options.”
A bank account represents a direct connection to a business or consumer’s daily financial life.
It holds all manner of data points that give lenders and payment service providers the information they need to improve their decision making, ward off would-be fraudsters and inform credit underwriting.
Call it “bank account intelligence.” As ValidiFI CEO John Gordon told Karen Webster in an interview, the granular details that give insight into an account’s behavior and payment performance are critical in improving the financial ecosystem at large as enterprises are better informed about attractive customer behavior that speeds approvals — and gets to more positive outcomes in the process.
To be sure, ACH volumes have been on the rise, and as Nacha estimated, there were more than 31 billion ACH transactions in 2023, representing $80.1 trillion.
“ACH is here to stay,” Gordon told Webster, adding that “there are benefits to service providers that they want to realize.”
Key among those benefits is pay by bank, which cuts down on transaction costs and can give rise to new use cases as faster payments become the norm.
“But the key to the arrangement is that if I’m going to take your pay-by-bank instructions — your bank account and routing number — I need to confirm that the account in fact belongs to the consumer who’s making the application or making the payment,” he said.
Nacha, for its part, has rules in place for debit transactions that demand account numbers must be validated. However, that rule does not go far enough, said Gordon, who added that fraudsters have gotten adept at using synthetic identities and other ruses to hide behind legitimate account numbers.
“What we find is that people who perpetrate fraud have scenarios where they use the same bank accounts, or they have a high frequency of change in those metrics,” he said.
In addition to fraud, risks tied to ACH payments can come in the form of what Gordon termed “returns that have no recourse,” or “fatal returns,” where transactions can’t be reversed, and in some cases, consumers have put “stop payment” instructions in place, which means that organizations must shoulder the loss.
These are blind spots that need to be addressed by strong verification processes, Gordon said.
There’s another blind spot when it comes to extending credit. Lenders rely on FICO scores, which in many cases are well-ingrained and valuable tools, but they sometimes come up short regarding applicants’ ability to repay their loans.
The average FICO score in the United States is 715 and has been on an upward trend through the past decade, Gordon said.
“But you’d be hard-pressed to believe that the consumer is in better shape based on Consumer Price Indexes,” he said. “…While you need a FICO score, we believe there’s more to know.”
FICO may be best viewed as a lagging indicator of creditworthiness and ability to repay, he said.
“But bank data and the consumers’ bank relationship, with all the information that’s presented, can fill in the gaps,” Gordon said. “What we have found is that if you’re just looking at accounts and routing numbers and not looking at the marriage between the account, the routing number and the consumer who’s applying with it — well, then, you’re missing the opportunity to better quantify that consumer on a number of different levels.”
ValidiFI’s Omni Platform, with 1.1 billion inquiries from consumers, cross-references identity information and bank account details, helping provide a more holistic view. The platform determines whether phone numbers and email addresses are still valid and how many email addresses may have been tied to an individual.
If there are four addresses opened in a 90-day period, a consumer’s risk profile soars by 70%, Gordon said. A series of non-sufficient funds transactions raises the likelihood that the next payment is also going to be a non-sufficient funds transaction by a similar 70%. It turns out that access to 90 days of transactional data carries strong value when it comes to predicting the consumer’s ultimate behavior.
“What we do is identify places, based on the velocity of bank accounts, where we can say, ‘This is potentially fraud’ or ‘That account is invalid,’” Gordon said. “We’re helping [lenders] flag things to drive things where they may want to inject friction into the process” so that they ultimately can make a better-informed decision about the individual.
“You’re going to get insights that are not only going to tell you that this is potentially fraud, but you’ll also get insights around the stability of the account, payment performance and how the consumer lives within their own financial means,” he said.
By extension, predictive bank-account-level intelligence can open the door to new financial ecosystems taking shape, including pay-by-bank use cases. Gordon offered the example where ValidiFI client PDI Technologies’ GasBuddy — which provides services to convenience stores, marrying pay-by-bank capabilities with the stores’ loyalty cards — has been able to approve more consumers as ValidiFI quantifies the consumer-bank relationship and assigns appropriate risk levels.
“The more I can say yes, the more I get to the end game, which is the connection between the brand and the consumer,” he said.
“We’re in the facts business and the information business” rather than existing solely as a fraud prevention solutions provider, Gordon told Webster. “We want our clients to have access to more information that’s going to give them more ‘yesses,’ and a basis upon which to make those decisions … and a better credit experience through data.”