Paying in instalments — Balancing Time-to-yes and Time-to-no.
Results from the survey "Buy Now Pay Later (BNPL) usage in Southern Europe" (includes France).
Algoan, the credit decisioning pioneer dedicated to simplifying access to credit, in partnership with Sia Partners, the management consultancy, tomorrow publishes the white paper “Buy Now Pay Later: Reducing the ‘Time-to-yes’ at what cost?”. The paper is a complete guide to the practices and key success factors of deferred and split payment processes and contains hitherto unseen data on the Southern European market.
“Once the domain of traditional banking institutions, deferred and split payments are currently experiencing a real boom with the rise of e-commerce and the arrival of new players specialising in split payments, notably Alma and Pledge in France. However, as with consumer credit, these easy payments can quickly become risky and repayments difficult to manage. In the Time-to-yes race, lenders need to understand how to measure risk. While it is crucial that the process is smooth, secure and fast, it also needs to be risk-free. For e-commerce, Open Banking is the watchdog that enables a balance to be found between the interests of both consumers and merchants,” says François Gutierrez, Chief Revenue Officer at Algoan.
What is Buy Now Pay Later (BNPL)?
There are three main types of BNPL that differ in terms of their methods, use, and regulatory framework:
- Payment split into three or four instalments: repayment is made in less than 90 days (outside the scope of the Loi Lagarde). This payment method involves simple customer processes and eligibility checks without the need for supporting documentation. Acceptance rates are very high, between 80 and 95% depending on the provider. It is the most popular payment method, worth €6 billion in France.
- Deferred payment or Pay Later (outside the scope of the Loi Lagarde) allows customers to defer payment, usually by between a fortnight and a month. It remains relatively marginal in France, worth a total of €100 million, due to the risk to lenders who do not collect any payment at the point of sale but collect in full two to four weeks later.
- Payment in more than four instalments, regulated by the Loi Lagarde and the equivalent to consumer credit. It requires supporting documents and a credit check.
A fast-growing market
First introduced in the early 2010s, Buy Now Pay Later has been growing rapidly for about five years. According to estimates by key industry players, the sum of credit extended could reach €10 billion by the end of 2021, compared to €6 billion in 2019. The health crisis, which caused the closure of shops for several months and encouraged the French to embrace online purchasing channels, has reinforced this trend. The development of online sales has suddenly become a key issue for many merchants, who see BNPL as a quick and efficient way to stimulate sales. According to an Opinion Way study in June 2020, 78% of customers would be prepared to change retailers so they could pay in instalments.
Survey on BNPL usage in Southern Europe (France, Spain, Italy and Portugal)
Algoan presents the results of its study, “BNPL usage in Southern Europe”, undertaken with Happydemics between 26th February 2021-3rd March 2021, and based on 4,401 respondents over the age of 18. The sample was surveyed via an online self-administered questionnaire (1,071 French, 1,011 Spanish, 1,083 Italian, and 1,236 Portuguese).
- A population seduced by split payments: 30% of French people (+6 points in 1 year)
Although BNPL does not yet enjoy the same market share as in Germany and Scandinavia, it has already been tested and approved by a majority of the population of Southern Europe. More than one in two French people have already used split or deferred payment when making a physical or online purchase. 40% of Spaniards and 33% of Italians have also used these payment methods. The Portuguese are more cautious, with only 25% having been tempted. These adoption rates can be explained by the late arrival of BNPL players in Southern Europe.
A closer look at usage reveals split payments are favoured over deferred payments. The former is used by 30% of the French, an increase of 6 points compared to 2020, whereas deferred payment is used by less than 20% of the populations of the countries surveyed. This facility, which allows people to spread the cost of their purchase over 3 to 12 installments, is particularly popular with the younger generations, especially those aged 18-34. Digital natives even consider BNPL to be a decisive criterion for choosing a retailer to make their purchase.
- 50% of the French worry about overindebtedness and hidden costs
The main disadvantage cited by respondents is the risk of overindebtedness. This fear is justified, as the level of overindebtedness in France is expected to increase in the second half of 2021. In France especially, more than half of respondents consider that these payment facilities can sometimes lead to higher than expected costs, due to unanticipated additional charges.
Proof that these payment solutions are used in times of financial stress is that 4 out of 10 respondents (among the Italians, Spaniards and French) have already been turned down by a BNPL scheme. Almost half of respondents claim not to have received a clear explanation for the reason behind the refusal. Consumers are therefore largely aware of the risks involved in these payment methods. This is a strong argument that demonstrates consumers would be open to better regulation of BNPL to limit these risks.
Overall, respondents said that an instant analysis of their financial situation would reassure them at the time of purchase. The second point of reassurance mentioned by respondents is the possibility of assessing their ability to repay from the merchant site. These are two needs that Open Banking can meet effectively.
Balancing ‘Time-to-yes’ and ‘Time-to-no’
- ‘Time to yes’: the Holy Grail for the (e) retailer and the customer
Today, BNPL schemes are created without breaking the purchase process, to be completed as quickly as possible without allowing the customer to escape to a competitor’s site. This is appreciated by consumers, and by retailers who benefit from much better conversions. However, the quest for an ever shorter “Time-to-yes” (the time to acceptance of the request for credit) sets aside good practices and warnings to alert consumers to the expense they are about to incur.
- ‘Time-to-no’ is equally as important, as a safety net,
The ‘Time-to-no’ limits future difficult situations for already vulnerable customers. This may appear paradoxical, but a fair balance is essential for merchants and consumers. By leaving in some friction points at the time of payment (such as avoiding 1-click orders), reinforcing pre-contractual information, and clearly displaying the cost of credit linked to the purchase.
“The absence of credit ratings in France further justifies the need to use credit scoring solutions during purchasing processes that offer credit. Consumers are aware and fearful of the potential risks of overindebtedness they are exposing themselves to by using BNPL. Simply providing some validation criteria, such as a credit assessment, and making payment acceptance less fluid, can undoubtedly provide reassurance and prevent an overestimation of a consumer’s ability to pay or repay. If ‘Time-to-yes’ is commercially important, ‘Time-to-no’ is equally important for the creditworthiness of the merchant and the end consumer. The only way to fight against time is with Open Banking and credit scoring,” concludes François Gutierrez from Algoan.