ERIN: Credit cards and loans used to be our only options when it came to purchasing the big ticket items we didn't quite have the money for. But since the turn of the decade, a new payment solution has been gaining traction around the globe.

AMANDA: We're actually seeing adoption across all generations. So everyone is trying it. The highest rates of adoption still remain in that gen Z and in the millennial. But we are seeing that others are trying it and using it in a repeated fashion.

NATHAN: It started in sort of retail. It's moving into things like veterinarian, even healthcare. You know, for an 800, $900 purchase, like you really do want some flexibility. That's very, very valuable.

ERIN: And buy now pay later isn't just for consumers. With new ways to utilize BNPL, businesses are also taking advantage of this cheap and flexible payment option.

MICKEY: Uh, think about, you know, your small and medium sized businesses. They have an interest, a need for buy now pay later. So I suspect that we'll see more adoption in that standpoint, to be able to paéy invoices or financing of a piece of equipment.

ERIN: This is Financial Futures, the podcast that charts, the frontiers of FinTech innovation. In this series, we're exploring some of the biggest advances in banking platform ecosystems that are rapidly changing the way consumers and businesses alike think about their finances. I'm your host, Erin Dangler. And today we're discussing buy now pay later, the new way to spread payments for purchases both big and small. I'll be joined by Mickey Lynch, product management executive at FIS Amanda McBee, buy now pay later GTM solutions director at Amount, and Nathan Hilt, managing director of Protiviti. We'll be breaking down exactly what BNPL is and how it differs from other loan and financing options. And we'll explore where this payment solution is being used and how new developments in the FinTech space could make BNPL payments as commonplace as contactless card transactions. But first let's find out how BNPL works and what separates it from a traditional financing option we'll all be familiar with, layaway.

NATHAN: Layaways is a great starting point and the easiest way to explain it to the vast majority of the people that are new to buy now pay later, uh, to the younger generation, the gen Zs, it's basically, uh, a one-click process that I would perform at the moment of transaction, typically on a mobile device, uh, and it's moving to e-commerce, but the concept is that you have a purchase that you want to have an instalment plan for. It also is something that's merchant sponsored. So the actual retailer is the one that's providing the service to you and the instalments. The key thing with this is the technology providers that have come into the scene and a lot of fintechs that have made this very simple, just to onboard a customer, et cetera, that made it very, very easy. And then the other thing we're seeing is, is growth. So it started out at something that's mobile, primarily kind of this fast fashion, I can do it very, very quickly. Also for large ticket amounts. We're seeing, you know, if anyone's gotten to Peloton, you experienced buy now pay later as one of the options. Uh, so it's moving more into mainstream e-commerce et cetera. And then I think there's potential that it's going to live in, uh, the physical world, and there are products that are ancillary to buy now pay later, such as a single use card, kind of moving into the plastic space. So it really is bridging the gap between new generational people that knew this as instalments and layaway to the team that, you know, this is how they purchase and make big acquisitions early on in their sort of life cycle, as a consumer.

ERIN: So basically the difference with layaway is, is you didn't bring home the product until you paid all the instalments. Can you walk me through paying these instalments? So let's say I'm getting a new home. I want to buy a new sectional sofa. I can do that either e-commerce or walking into a brick and mortar store. So I decided I'm going to break it up into payments. Do I get to decide how many payments?

NATHAN: Usually it's four. That sort of the industry standard. Now, typically your first payment is not necessarily at the moment in which you make the purchase. A lot of it varies between the terms and what the merchants provided, but usually it's you make the purchase within the first 30 days you make that first payment, and then that's where the check mark is for the next three payments. And the other is that there's no interest charge if you pay off the entire amount. Let's say that sofa was a thousand dollars. Brings it into four equal instalments of $250. You make those over the next four months typically is the duration and there's no interest charged. And then if you need more time, that's certainly an option. But in the typical thing is for instalments over four months.

ERIN: Excellent. And I just want to circle back with you on one more thing before we move on. Can you tell me a little bit more about virtual single use cards? This was a new concept for me.

NATHAN: The easiest way to think about it is that, you know, a card has an account behind it. Uh, what we're finding is that the banks are able to determine a single use for that particular account, and then to make it very, very specific versus like a revolving account, which is a typical credit card that has multiple use and lifespan. And then a debit account, which will be mapped to your demand deposit, checking account, et cetera. So this really is just that same account, similar functionality and how you use it, but then very specific in the timing and duration for that particular account.

AMANDA: And another use case that we're seeing for those single use virtual cards are the FinTech players. The Klarnas and Affirms of the world are issuing one-time use virtual cards where you, before purchase, so you could go into the app select, oh, I want to buy some shoes at Nordstrom, and I want to do a pay in four plan. And it will issue you a card that you can then go and use and transact at that store. So it's a single use, pre-set, for the plan and breaks up that purchase into those four payments.

ERIN: Interesting. Okay. I've heard of buy now pay later and I've seen it all over the place, but I have not heard of that. Well, Amanda, since we've got you on the line here who is adopting buy now pay later in the marketplace?

AMANDA: There are two primary demographic groups that have adopted this early, but we're seeing the trends change, particularly in 2021. Uh, you know, initially you saw a lot of early adoption from those gen Z, mobile-native shoppers, especially those who are debit preferred new to credit. This was a very highly appealing construct because you could buy something now and spread those payments out over time for kind of budget friendly payments that evens out your, your cash cushion and provides transparency while avoiding some of the perceived downsides of credit. So what we saw initially was, particularly at that point of purchase in categories like fashion, electronics, cosmetics, you would have this option to buy now and pay later. And so with gen Z, that took off and, and we're seeing, you know, about 50% of gen Z saying that they've used it at least once. And, uh, the appeal is the transparency, the ability to spread it out over time. Um, those split pay, pay in for purchases tend to be $500 or lower, but then coming into 2021, there have been a couple of trends where we're actually seeing adoption across all generations. And so everyone is trying it, the highest rates of adoption still remained in that gen Z and in the millennial. But we are seeing that others are trying it and using it in a repeated fashion. And then what's interesting about that is, buy now pay later isn't just for people who are new to credit or debit preferred, you know, there was a TransUnion study that came out in September of 2021 that showed that individuals whose buy now pay later have multiple types of credit relationships. They're not actually completely credit averse. So it really does cover the spectrum of your consumer in terms of who's adopting it. And then finally, one, kind of, consumer need that we're seeing out there is that consumers are interested, they do expect it at checkout, but they're also wanting to get it from their banks and that isn't readily available now. So they are seeking something that might come actually from their bank where they have an existing relationship.

ERIN: So, and what, I guess this is a nice segue, what benefits can financial institutions and merchants provide to those who are activating buy now pay later offerings?

MICKEY: Definitely spreading payments out is probably the single greatest benefit to consumers. I think when you couple that, um, with a flawless user experience, helping build a credit score for the underserved and you know, again, going back to that defined monthly payment repetition, it's easy to see why it can really lead to adoption across the marketplace. I think the other benefit worth calling out is really around the buy now pay later vehicle. There are many ways in which a consumer can interact from a buy now pay later standpoint, right? We talked about the e-com checkout experience. You know, it's in store at point-of-sale as well, you've got the buy now pay later card that allows consumers to buy now pay later whenever they shop using traditional payment rails. There is the virtual single use cards that we've talked about as well. And then there is the post-purchase side. So, I'm in my mobile banking app and I want to convert to an instalment plan. At that point, I have that opportunity and option. When I walk out of a retailer after buying a TV, for example, I could get a text or an email, and then once again, be able to act on it. The latter, the post-purchase side, really, to me feels more like a commodity, uh, you know, everyone needs to offer that, but I don't think the adoption is going to be there. But I think when you look at during purchase and pre-purchase, that's where the biggest opportunity lies across the board.

ERIN: And Amanda, you had mentioned that this was already in place prior to the pandemic. Do we see a big uptake during the pandemic with more online shopping and people may be out of work more?

AMANDA: That's exactly right. Adoption accelerated exponentially in 2020, absolutely with the tailwinds of the pandemic. And this is where the proliferation, in terms of the merchant adoption, this really spread across 2020 and into 2021. And it appears to be here to stay at this point.

ERIN: That's kind of the norm right now is whatever technology is changing is here. So we just kind of have to get used to it. But how are retailers keeping up with that? Was there like a, we're land down the track while the train is coming kind of feeling?

AMANDA: At this point in time, the merchants know that this is something that they need to offer, that their consumers have come to expect. What is fortunate is that for the FinTech players, they designed their buy now pay later offerings with a merchant-first orientation. So they truly understand what merchants need, and they truly understand where merchants fit in the spectrum of buy now pay later, they are the critical lever to driving adoption and repeat usage of buy now pay later plans. So what fintechs have done to ease that friction for the merchants is they make integration, the ability to get it live, very easy. They have really simple onboarding tools and guides, very user-friendly, um, low to no code. They offer incentives for it to cover implementation. They offer marketing plans - they go in together on marketing deals and opportunities to co-market. And they offer ongoing reporting and analytics and tooling on the backend to make it an easy to use tool that the business owner can leverage that reporting and those analytics to prove out the value of the buy now pay later. Because they expect to see higher rates of conversion at checkout, and they expect to see higher levels of repeat purchases and stickiness and loyalty and they also expect to see higher basket sizes. And then going forward, I think we're really going to see multiple buy now pay later options at checkout. And what we've seen in Australia and what we probably will see here in short order are a couple of those buy now pay later options for consumers. And then addition to the, kind of the FinTech players will likely start to see some bank offerings as well at that checkout. And a lot of those times, I think we'll see tech players as entrance partnering with banks to really make it easy to onboard and accelerate adoption. And then I think just one other thing to call out there is this risk of disintermediation because the Klarnas and the Affirms and others of the world are creating these kind of super app ecosystems, where they want the consumer journey to start within the Klarna app and then go to the merchant, whereas the merchant, right, wants to keep you on your site and have you as part of their loyalty program and their ecosystem. And so I think you're going to see more and more merchants wanting to have more control and ownership over that experience. So you might start seeing some actual like merchant white label buy now pay later option.

ERIN: Whether the retailers like it or not, customers want BNPL. And that's not just online, but in store too. So merchants need to start working out how to integrate this technology into their physical and digital space. Thankfully, there are plenty of BNPL providers willing to partner up with retailers to make that transition as easy as possible. And with so many players operating in this space, partnerships between banks and fintechs are priming the market, not just for healthy competition, but tremendous innovation.

MICKEY: I think there's no question fintechs have historically been in the driver's seat of buy now pay later, globally, as, as you take stock of where we've been. You know, candidly, they've taken a significant market share from traditional banks, but you know, as you look at, what's been accomplished in 21, we've seen tremendous focus and action from banks, partnering with fintechs, driving new solutions, partnership structures, which really has driven down the cost of merchants. You know, you think about. Earlier parts of 21, late 20, the cost for the merchants, those costs for the consumer was significantly high. Now you've seen that drop significantly in terms of interest rates and things of that magnitude. I also think in terms of strengthening the buy now pay later offering again, comes back to at point of need, right? The delivery vehicles, the card, whether it be physical, whether it be a single use virtual card or even the post-purchase pieces. I think those are absolutely tangible, uh, examples of, of real output and action that we've seen through the course of 21.

ERIN: So are banks and loan, origination companies treating the buy now pay later model differently to how they would treat a credit card?

MICKEY: So the way I would think about that is from a financial institution standpoint, as you think about loan origination. Loan origination has historically been a assisted in branch experience, or it's been a direct to consumer small business where you have to act and you have to say, hey, I want an unsecured term loan, I want an unsecured line of credit. Where you think about how banks are looking at buy now pay later, I would go to the issuing side of the house where loan origination has historically been on the retail side of the house or commercial side of the house from an issuing standpoint. I think you look at this and you see how banks are taking stock of the market. They're looking at how can I issue a buy now pay later card? How can I enable my card processing platforms to be able to handle post-purchase capabilities? How can I, from a banking standpoint, how can I fund loans at the point of sale? So Amanda mentioned earlier about white labelling capabilities, right? So where can I partner with a FinTech as a financial institution and drive loan volume through customer acquisition, through e-commerce checkout experiences that are deployed in my merchants. So that would be how I would categorize and look at that space.

NATHAN: The only thing I'll add is I do think that combination of it's a portfolio, so there's some attributes that feel like a card because it is instalment - there is a side of how to onboard that in a proactive way, which is different than, you know, traditional loans, but then really tying in with the merchant. I think that's going to be the piece where if a bank has a very good relationship with the large merchant and is able to bring these pieces together, which oftentimes sit at different places within the bank, that really is the value proposition is if you sprinkle in the FinTech along with that, and that creates a really seamless package, I think that's like where you get the win-win win all across.

AMANDA: I agree. There's a really nice alignment of incentives because for the bank, they want to keep that relationship within the bank. The FinTech players are coming in, their initial point of entry with the consumer is to start with a BNPL plan and then they want it, they're starting to see them starting to add a checking account or these other financial products. So banks can keep the relationship by offering the bank buy. Now pay later is another payment mechanism banks working with merchants can maintain the relationship with the merchant, and not avoid that disintermediation again by the FinTech, and the customer gets to buy what they want and use the bank that they know and trust or a bank that has a known name that they value and trust and feel secure in doing a transaction with.

ERIN: And that was one of the questions I had because we're going to start talking about financial wellness is the security of all of this, like trust. If they're tied with the bank, the consumer is going to feel more trust and without the bank, are these buy now pay later plans regulated?

AMANDA: Great question. And that's going to be a big story of, of 2022. We had the CFPB inquiry that you know, happened in December and the data, the reporting is due back in March. So we'll see a lot around that story this year. I think, you know, there are a couple of questions there around the transparency of the plans and fees and, and the customer experience, there is a piece around the data, and then there's a piece just around customer wellness. So banks have a lot of inherent strengths when it comes to providing buy now pay later to customers, particularly around financial wellness. Many banks offer pretty robust financial wellness programs, and they also have better line of sight into a customer's existing spending. And so that can work for both, you know, decisioning, but also for enabling a customer to manage multiple plans or to decide whether to use a buy now pay later plan to fund a purchase or another instrument. So I really think in 2022, we'll see that banks will be able to play to their strengths along those lines.

ERIN: What are some of the risks of the BNPL model?

NATHAN: I mean, I'll echo a lot of what Amanda said. I would put them into two very large buckets. One is around this protecting the customer. I think that's what the CFPB is really looking to understand. And then how the players within this model are doing that. And so it's everything from, you know, the terms that they're agreeing to it's understanding the charges, whether it would be within the payment period or outside of that, what the total costs are. And the thing is the CFPB kind of came into its position around prepaid programs and some of the card programs. And this is the same thing. It's like, there was a lot of churn out there, customers were unhappy, they were seeing some of these charges that they didn't understand. It really is around that financial wellness is to make sure that the consumer understands and they're somewhat protected from themselves, because this is very easy to get in over your head, and to make sure also that if I have a dispute, if the merchandise isn't good, what can I do for a return? What does that mean for me? Like all of that life cycle. And the card world has been defined over years and years and years. And then there's regulations to support that. That buy now pay later has to find a home for that, so that's one big piece. And the second is, you know, fraud. This program is new. You don't have these really, really from FICO scores that were used and for good reason, it's a different model. And then you have a lot of analytics and data that the fintechs are using. But the jury's kind of still out whether or not this is going to be something that's highly targeted, if you're going to have sort of this friendly fraud, like what does that fraud picture look like? I think there's a potential risk. Again, there's a lot there to manage it, but what we're going to see as this scales is, it's probably going to be a spike.

ERIN: And do these services protect against fraudulent activity? Or is that stuff that's in development?

NATHAN: A lot of the analytics and the underlying program are actually built around, protecting against fraud. I think if the banks come in, right, they do a lot of these things really, really well, as far as the customer life cycle, the journey, disclosures, working in a regulated environment and protecting against fraud. So I think as this grows and expands, you're going to see more players participant that this is kind of their core offering. So the services are there now, and then they're going to get more engaged as the process grows.

ERIN: And what about overspending? Are there regulations in place to prevent that? I mean, because it's not like a normal loan where you look at how much money I'm making and see if I have an ability to pay.

NATHAN: That's one of the pieces is that with the popularity, are there people that have 20 different buy now pay later accounts all going at once? And is that now overburdened them against what they have as income and can they keep track of it all? I think that piece, as it grows and matures, you're going to see more functionality. And again, Banks offer that services and the fintechs can offer those pieces to really give you a complete view across kind of my personal portfolio, what I've opened, et cetera. Uh, so those things again are out there, but without a doubt, there is an ability to overspend with buy now pay later, yes.

MICKEY: One thing I would probably add there is, you know, when you talk about overspending, I mean, that really ties into the three key pillars of what the CFPB is doing around accumulating debt and regulatory, arbitrage, and data, as Amanda had mentioned earlier. You know, the accumulating dead side of the house and that's where you're, you're essentially saying consumers are having difficulty in tracking when payments are scheduled and potential ramifications if they're not having enough money in the account to cover that, right? And that leads to, you know, additional charges, uh, from that same point, you know, when you think about regulation, arbitrage you're obviously considering buy now pay later companies are not adequately evaluating what consumer protection laws apply to their products. And then when you think about data harvesting, I think certainly you got to consider access to data that the buy now pay later lenders have and how some of that is collected and used. You mentioned fraud as well, so I think it's, there has been a rise in buy now pay later fraudulent activity, and it really revolves around account takeover and origination fraud. And, you know, I think this pushes financial institutions to rethink their onboarding process and really consider preventative technologies embedded within the customer experience. Ultimately, I think this becomes how much of a customer experience sacrifice will they accept? Sometimes, you know, when you think about buy now pay later and what's the course of the best adoption is, is every one of us has a traditional credit card that we use. And, uh, we're just ingrained in our minds and our DNA on how to use it. And so if you're using a card that you're used to using, you're probably gonna adopt it more and utilize buy now pay later during purchase from, from that same point. If I got to go out to my virtual card and I have to act, uh, every time I want to be able to initiate a buy now pay later offering that could lead to less customer adoption, right, and again, I think it goes back to the consumer experience. And what is the consumer willing to accept in terms of additional friction and whatnot?

AMANDA: And I think those are really great points. And I think that particularly that partnership between the FI and a FinTech partner, to be able to best kind of find that point of convergence between mitigating fraud and optimizing the customer experience, there's a, there are a lot of opportunities for the two to partner together so that you truly know this is the customer that they say they are, and you can do that in a low friction way. And the other thing was going to piggyback on. What Nathan was sharing around kind of debt accumulation, the banks are best poised to have that full picture of a customer and kind of their inflows and outflows and be able to make that recommendation. That's kind of in the best interest of the customer and to help them manage all those existing plans. So I think absolutely a FinTech can offer it, but who's best kind of out of the gate positioned to do that well, and to operate in this increasingly scrutinized regulatory environment are the banks, because this is their that's their bread and butter is what they do.

ERIN: One of the biggest draws of BNPL is its ease of use. Within seconds, consumers can easily spread the cost of their purchase without having to jump through the hoops of applying for a loan or paying the high interest rates associated with a credit card. But as financial wellness and security become increasingly more important to customers, perhaps stronger verification measures and higher regulation will actually strengthen BNPls' position at the top of users' digital wallets. So with its meteoric rise in popularity and banks, fintechs and merchants, all working hard to roll out their own BNPL options is buy now pay later here today, gone tomorrow? Or will the market support this solution, long-term?

NATHAN: I think the answer is yes. Uh, for multiple reasons. The first being the gen Z-ers are driving this is their behavior. So like, if you want to attract that customer demographic and do it in a seamless way, this is kind of what you need to do. And then the second is the expansion. Uh, so I'm like, Amanda, I'm ready for hearing all that's going to come out of the 2021 Christmas spending season and how this has grown and changed et cetera, because I I'm a believer that it will, and the fact that other demographics are driving this makes complete sense. And anyone that's sort of been in payments for a long time, you realize nothing dies, they just all kind of live together. So this idea that I may have two credit cards, but I used to do layaway and that would co-exist and now I do buy now pay later, it's just spending behavior and kind of that bucketizing that humans do when they want something and how they manage their funds. So I think that's another piece. And then the last is it's extending into other segments. So, if it started in sort of retail, it's moving into things like veterinarian, even healthcare, other places. Like your dog has a problem, a lot of people don't have the $800, $900 or a pet insurance or things of that nature, and with the pandemic and pets have boomed, uh, we're going to see these sort of lifecycle type things that, you know, for an $800, $900 purchase, like you really do want some flexibility in how that works and it's a service that otherwise you would have put on a credit card, which you may still, but this idea of bucketizing and to pay it off and that mental aspect, and I'm only going to do it over a period of time - that's very, very valuable. And it's seen as to be able to afford some of the things that otherwise they maybe wouldn't be able to. So, if you think about like, it started with this seamless customer experience, it's expanding and demographics, and then I can use it more and more. And then I have this underlying more players participating in that model. I think we haven't seen anything related to the hockey stick of what this could be.

ERIN: So what do you see as the biggest opportunity for BNPL offerings in the future? If this is going to be here to stay, where can people seize opportunities?

MICKEY: That's a very good question. I think with all technology and solutions, the most opportunity lies where customer satisfaction is, uh, which will obviously lead to highest mass adoption. You know, I think we witnessed it become a global payments phenomenon. There are portions that are already becoming commoditized, uh, to some extent. But, you know, it will spread to other customers, uh, verticals. Think about, you know, your small and medium sized businesses. They have an interest, a need, for buy now pay later so I suspect that we'll see more adoption in that standpoint, that lens to be able to pay invoices or short-term financing of a piece of equipment, right. So I think there's also a lot of space to move into larger dollar purchases as faster automation and secured lending could drive more instant decisions for bigger purchases. So we talked about pay in four and split pay, but the next level-up for those types of things. And then last but not least, I think it's all around, how do you generate long-term customer loyalty? How do those programs come into play in terms of just overall adoption?

NATHAN: My 2 cents is that I agree with the larger ticket. Like where is this going? But I also think, you know, in payments, there's this thing called an integrated service provider and there are technology providers and they have done a great job of getting software into a lot of these smaller verticals that traditionally, maybe didn't accept payments or cards, et cetera. And I see buy now pay later following a very, very similar model that is going to become more embedded, more integrated, simpler, and then things like, you know, have my child, you know, get the knee surgery and I'm going to pay that over instalment plans is going to be simple and it's going to be something that is digital first, et cetera, and even getting into categories that maybe in the card world are considered risky, but like, I'm going to buy the Tiffany diamond through a buy now pay later. And I'm going to take that vacation for an all-inclusive package. And I'm going to put down on a buy now pay later plan, and then in four instalments, I'm going to pay for that and go have a great vacation. So I think it's going to move into lots and lots of different categories that today you don't see it. And that's going to drive a lot of the growth as well.

ERIN : Interesting. How about you, Amanda?

AMANDA : Yeah, I echo a lot of the same sentiments. I think to add in addition to the new verticals and categories, I think we'll also see use cases along the lines of there'll be adoption of this at checkout for small and medium-sized businesses. I also think we could see buy now pay later for small and medium-sized businesses. So more of a B2B model of buy now pay later as another means of funding and lending. So I think that that's something that is an area of opportunity. I also think, uh, in terms of that merchant, white-label type experience, I think really looking at that existing, your traditional co-brand credit card strategy and seeing where they take that with a buy now pay later product and how they weave in rewards and loyalty with a buy now pay later plan, particularly, uh, you know, Nathan alluded to like buying a vacation package, you could see it with hotels and with airlines and those that have those robust, existing rewards programs. I could see buy now pay later being a natural extension in that ecosystem.

ERIN : Mickey Lynch is product management executive at FIS. Amanda McBee is buy now pay later GTM solutions director at Amount. And Nathan Hilt is managing director of Protiviti. That's it for today's show. Thanks for joining us. We'll see you next time when we'll be delving into the world of financial wellness and wealth management, as we ask, how are financial institutions? Helping to create a financially savvy and inclusive society?