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I thoroughly enjoyed participating in the AFR Banking Summit’s discussion about the newest game in banking – Buy Now, Pay Later (BNPL) – and its exciting trajectory. In fact, for the last few years it has been closely watched by just about every player in the financial services industry. Research by Ray Morgan (2019) also suggests that over 12 million Australians are well aware of this payment option. And, best of all, Australia is leading the charge in driving this bold innovation on the global stage, changing the way millions of consumers pay hundreds of merchants for products.
Yesterday’s panel on the rapid evolution of BNPL struck chords on many levels. None more so than the stark reminder that no matter where you play in the value chain, your focus needs to firmly be on adding clear value to one or both sets of stakeholders, namely customers, and merchants. If you can crack that nut, you’ll succeed in this fast paced, ever-changing game.
So let’s unpack all of this a little more.
Australia is leading the charge on innovation
Richard Wormald, Division President Australasia, Mastercard, kicked things off with some well-deserved recognition of our local entrepreneurs who have rightly focused on driving benefits. “We should all be proud of the innovation in this space, which has been globally validated, and it’s happening right here in Australia. We were involved at the early stages of BNPL’s development, took great strides early, and there is lots more to go (as seen with other innovations like contactless, shopping online and digital wallets).” I couldn’t agree more. It’s a very exciting time to be operating in financial services right now.
Buy Now, Pay Later has to be all about the experience – for buyers and sellers
Lee Hatton, Executive Vice President at Afterpay, spoke about BNPL being all about a completely different experience in how people can manage their money, or serve their customers. “I love this concept of the two-sided platform with buyers and sellers, and connecting them in a way that brings joy. It’s not just a transaction anymore. It’s about changing the way younger generations – especially millennials and Gen Z – can see the world. And other generations are following suit.”
When you show clear value, magic happens
Building on what Richard and Lee said, I spoke about how excited I am about the innovation that is happening, after many years of false starts. If you can deliver clear value, and create memorable moments for all the right reasons, your services will be in high demand. Financial services has always been challenged to be more innovative, and it is fantastic to see it happening at pace!
Fixed term instalment purchasing is a megatrend
Rebecca James, CEO of Humm Group, is also excited by the emerging innovation in financial products and services, and the continued focus on making sure these work for the consumer first and foremost. She spoke about the shift she has seen in consumer perspectives to the desire to use tools that help with budgeting, and how the industry has responded. “We’re starting to see the market progress with a different range of products – closed loop, customer pays, merchant pays, divergence in flexibility of limits, frequency of repayments, longer to repay – all of these options are adding up to a product construct that really works for the consumer.” It also means that no one player will dominate as the range of services is too broad and each requires specialisation.
Buy Now, Pay Later has an expansive landscape
A term can lose meaning when it is used too often. From my perspective, there are four dimensions to the vast ‘world’ of BNPL:
1. Players: We have seen four types of competitors. First, ‘new incumbents’, think Afterpay; next the ‘mature upstarts’ being the Big 4 banks. We also see ‘global entrants’ like Klarna coming into the Australian market. Finally, we have many ‘pure innovators’, such as OpenPay. The question is, what impact will all these players have? Are there too many? And how will they differentiate in the minds of customers and merchants?
2. Products: The BNPL service description is widely known for its divide by for instalments, but lesser known for the value it provides merchants – like driving customer acquisition and bigger basket sizes. However, BNPL is broader than this service. Many are combining with other credit products to expand the value offered to customers for different needs, such as bigger purchases. Additionally, products can support different merchant commercial relationships, these are known as Open loop and Closed loop arrangements. Value is also unlocked with other wonderful innovations like shop directories, loyalty programs, budgetary management tools… you can see there is a rich and thoughtful set of product dimensions!
3. Segments: While BNPL started with millennials, the industry now targets a broader set of consumers, right up to small to medium sized enterprises. BNPL has a double-sided segment focus – both consumers and merchants. A key battle ground has been winning merchants. While most have started with Fashion, other verticals are being targeted to support consumers, think of Health, Travel, even Solar. The important part here is that BNPL players may end up with deeper vertical expertise and offers – thus consumers use different BNPL players for different purchasing needs.
4. Business models: There is an ongoing debate about how industry players are making money – either by charging the consumer, or merchants, or finding other mechanisms to monetise the customer base. This is an exciting space to watch and will continue to evolve.
Customers are evolving the sector
When you have an engaged customer and merchant base, the space is full of opportunity. Lee Hatton spoke about how customers who trust you give you significant potential to speak with them about the different things that are going on in their lives. In fact, Afterpay’s latest collaboration with Westpac – essentially banking as a service – was the brainchild of customers who told Afterpay that they wished it could do more, with the catch cry of “How do I Afterpay my life?”. It was a problem begging to be solved, and not alone, but with the right partner to give customers what they were asking for.
The BNPL model naturally lends itself to collaboration
As we like to say at Deloitte, we are stronger together. Unusual collaborations will take this space to a whole new level. Then there’s white labelling, and the reordering of who sits where. As Richard said, Mastercard “provides the rails for BNPL to work as seamlessly as possible. We aren’t a credit card company. We are a business that runs the train tracks, and other people run the trains – and the more trains we have on the network, the better. We worry about cyber security, and providing a safe set of rails for other players to innovate on… we can see we need to be alive to some of the emerging tech changes, such as a new world in which others will approve payments on our behalf. We need to make sure that bad players don’t enter the network.” I love Richard’s analogy, and the fact that everyone is playing to their strengths to serve the end users and inspire confidence in this payment system.
The market is huge and competitors are dynamic
Rebecca shared that the estimated size of the BNPL prize is some 22 trillion dollars globally. This comes with intense competition for a piece of the pie. Banks are entering the space relatively quickly, either as investors, partners or direct competitors in an attempt to stay close to customers. Interestingly, banks used to focus on minimising dwell time on their banking apps to demonstrate efficiency, however they now may be shifting to finding ways to add value to customers and trying to make them interact for longer.
Not all value propositions are created equally
I wholeheartedly agreed with Lee when she said that it’s up to the customers to decide what is best for them, which means no one player will dominate this space, as people are unique with unique wants and needs. It’s not one size fits all, and that’s important for innovation.
The question of margins and tolerance to fees
As more players come into the market, Jonathan asked us all if margins will come under pressure – and who pays them? Merchants or the customer? This was an interesting topic to debate and, again, it comes down to value. If you’re providing value to customers or merchants, they will pay. For example, the end to end cost of taking a customer through your online website and through to payment is costly and hard. Especially when half of them don’t finalise their purchase by ‘clicking pay’. Replacing investments in Google ad words and website optimisation with improvements in the sales conversion process for merchants makes business sense. And as Richard pointed out, merchants have choice and discretion in which payment mechanisms they put up on their webpages, and this choice is a great thing because it encourages competitive pricing. Maybe the next battleground will be merchants more actively managing their BNPL and the payment pathways available, in order to optimise the customer conversion and ensure customer aren’t rejected at the point of clicking the payment button.
Other customer segments are jumping on the band wagon
We closed our panel with the debate about whether busines banking customers can also be offered BNPL solutions. Indeed they can! Rebecca mentioned that in response to demand, Humm Pro was launched last month for business customers, and already its cost per customer acquisition is cheaper than any other product in this space. The demand is really high. And it is great to see the industry respond. The consumer trend of paying things in fixed term instalments can translate into the SME sector, both here and overseas. Like individual customers, the focus needs to be on creating a similarly frictionless experience for small businesses, as well as the ability to pay in fixed term instalments.
· Jonathan Shapiro, Senior Reporter, The Australian Financial Review
· Andrew Pellow, Strategy Partner, Monitor Deloitte
· Rebecca James, CEO Humm Group
· Richard Wormald, Division President Australasia, Mastercard
· Lee Hatton, Executive Vice President, Afterpay
Andrew is the Sydney Managing Partner. He is a Deloitte Monitor Strategy Partner focused on Financial Services and consults to clients in Australia, New York, London and Asia. Andrew is the lead advisory partner for a major Australian Financial Services client, as well as the COO for Deloitte’s Strategy & Operations group. When advising clients, Andrew brings a mix of analytical and design thinking approaches to help clients understand and navigate current business challenges such as growth through innovation and digital disruption.