Buy Now, Pay Later: a model with huge potential in Latin America. And opportunities for your business!

Publicado em 21 de abril de 2022.

Tempo de leitura 8 minutos de leitura

If you like to keep tabs on the banking and payments market, you’re sure to have heard about the rise of Buy Now, Pay Later. And that’s no surprise, as it’s one of the hot topics in the sector at the moment, with great potential to enable more financial inclusion and access to credit, while also driving business growth.

 

It’s all in the name: Buy Now, Pay Later (or BNPL) is a payment solution that allows customers to make a purchase in the present and pay for it later.

But how does it work? Mostly, it’s used for online purchases, which can be paid for in a single repayment or in multiple installments without incurring any interest.

What really makes BNPL different from regular loans or traditional store credit is that the merchant or retailer receives the full sum up front, minus only the fee charged by the provider to enable and/or maintain the payment method.

 

Buy Now, Pay Later: exponential growth

Mainly because of this great advantage, but also because of the increased digitalization driven by the pandemic, BNPL has grown a lot in the United States and in countries from Europe in recent years.

For instance, it has even outstripped the growth rate of wire transfers and digital wallets like Apple Pay, Google Pay, and Samsung Pay (source: PYMNTS.com and PayPal).

 

It’s worth looking more closely at some figures:

  • Today, BNPL is the fastest-growing payment method in several developed countries, according to research by PYMNTS.com and PayPal;
  • BNPL is more popular among younger age groups: eMarketer predicts that in 2022 it will be used by 44% of generation Z, 37% of millennials, 23% of generation X, and 9.4% of baby boomers.
  • The main drivers behind the uptake of BNPL are its ease and convenience, especially because it doesn’t demand lengthy credit checks and it’s completely integrated into the buyer’s journey and checkout experience.

Source: Finder.com

  • IBIS World expects revenues from BNPL to grow by 9.8% in the coming five years, topping the US$ 1 billion mark;
  • Online payments using BNPL are expected to reach US$ 680 billion by 2025, which is 92% higher than in 2019 (Kaleido Intelligence).

And it’s probably no surprise that riding the crest of this wave are fintech companies, which got a head start on the other players. However, recently a few banks and some other giants in the payments sector like PayPal and Visa have entered the fray.

In fact, for Buy Now, Pay Later to expand around the world and gain a strong foothold in Latin America, more and more players will have to start offering this kind of solution.

 

How does Buy Now, Pay Later work?

Unlike other forms of payment, customers are generally offered BNPL at different stages of the buying journey. When they’re browsing products online, for example, the product page may show them the price broken down into BNPL installments, helping make the purchase more accessible.

Consumers can also choose BNPL at the checkout. And some financial institutions and issuers are even offering a Buy Now, Pay Later option for cardholders to pay for specific transactions in installments, giving them the freedom to manage their cash flow better and avoid late payment charges.

 

The DNA of Buy Now, Pay Later in Latin America

With e-commerce already growing apace in Latin America, it’s likely that BNPL will also begin to expand rapidly in the region.

The large unbanked population of Latin America and their difficulty gaining access to a financial system that’s increasingly digital has had the effect of limiting their ability to buy things online. And we’re not talking about a small proportion of the population: according to the World Bank, 55% of all adults in the region are unbanked.

It’s worth remembering that if someone who doesn’t have a digital account or a credit or debit card wants to buy something online these days, they have to use cash-based alternatives. In Brazil, for example, barcoded bills are the option, while in Mexico there is a voucher system administered by local convenience stores, but for all these forms of payment the customer must have the available balance.

This makes the scenario in Latin America promising for new Buy Now, Pay Later options, as it gives people who don’t have the means to pay for a purchase up front access to e-commerce.

 

Shortage of data is still a challenge

But despite the great potential and even the need for more progress in this respect, there is one big challenge preventing the quicker uptake of BNPL in Latin America: a shortage of data.

In order to offer credit, BNPL relies on a robust information system whose algorithms use certain types of data to make a “soft” check of users’ creditworthiness. Unfortunately, in Latin America the availability of quality data on individuals is still limited, making it hard to build up reliable credit profiles.

Because of this, the players are having to take one step back and search for information on repeat purchases and payments or other data they can use to develop the algorithms or invest in improvements to the existing systems.

 

Why is BNPL set to grow even faster?

Despite the challenges like the data bottleneck, there are already fintech companies and players from other sectors (like retailers) working to offer increasingly enhanced BNPL solutions to the Latin American market – which suggests that it is likely to gain more space in the coming years.

And this speed will be driven by a number of factors that are having a significant impact on the region’s banking and payments ecosystem:

 

Growth of digitalization and reduction of the unbanked population

The unbanked population has shrunk sharply in recent years, which is an important indicator of a new reality in the countries of the region.

Also, the digitalization spurred by the Covid-19 pandemic and the accompanying rise in e-commerce and the resumption of economic growth are irreversible changes, meaning that online shopping is sure to carry on growing.

 

Potential of embedded finance and its impact on BNPL

Embedded finance has great potential to take BNPL to the physical retail setting.

It means that companies that do not necessarily operate in finance can start offering solutions like BNPL to their customers and users, with retailers topping this list.

 

Growth of open banking is a driver of Buy Now, Pay Later

Mexico and Brazil have already begun rolling out open banking, and other countries in the region are now following suit.

An open financial system not only contributes to the issue of user data sharing and thereby helps the expansion of BNPL, but it also makes it easier for companies to offer credit.

 

Greater user confidence

Something else that will help BNPL gain a stronger footing in Latin America is increased consumer confidence in financial services offered by players other than the traditional financial institutions.

As the number of fintech companies in the region rises and companies from other areas of the economy start to offer novel and competitive services, consumers are gradually taking up these offers and benefitting from these services.

 

Social commerce as a key player

Gone are the days when social media was just somewhere to chat with our friends. Purchasing products through social media networks has become an integral part of online shopping. It’s expected to account for US$ 84 billion in US retail sales by 2024. In fact, 40% of American generation Y and generation Z consumers already use social media to make purchases.

 

BNPL: a transformation to keep on the radar!

It’s clear that Buy Now, Pay Later is set to transform the Latin American banking and payments ecosystem very soon, right? And that could mean a whole swathe of new opportunities for different players – and not just for those that are already part of the sector.

It’s something we will be keeping on our radar to see how it develops and impacts the sector!

 

Buy Now, Pay Later at a glance:

  • Buy Now, Pay Later is being used mainly for online purchases, which can be paid for at a later date in a single repayment or in installments free of interest.
  • BNPL is currently the fastest-growing form of payment in the developed world, and it’s expected to continue to grow exponentially until at least 2025.
  • Despite the challenge that the shortage of data in the region poses, BNPL has great potential to help boost the financial inclusion of the Latin America population and provide them with access to credit, driving businesses throughout the region.

 

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