By: Cody Banks, MVP, Payments and Fraud Strategy, PSCU

E-commerce boomed thanks to the pandemic. This increase in online shopping gave rise to Buy Now, Pay Later (BNPL) point-of-sale installment payment plans. BNPL is now a common sight during the online checkout process, with major players like Affirm, Klarna and Afterpay leading the charge.

This momentum has continued. Within the first two months of 2023, Adobe Analytics reports the share of online purchases using installment payment services grew 10% year over year. Insider Intelligence estimates there will be $680 billion in BNPL transactions by 2025. However, as BNPL transactions continue to surge, so do concerns about the industry's practices and financial outlook.

Installment payments have received media scrutiny in recent months, spotlighting how many BNPL providers fail to grant consumers the same rights and protections as credit card companies. BNPL providers that rely on loans find they’re more expensive due to higher interest rates. A few big banks are also reporting an increased rate of credit card delinquencies, and this trend will likely carry over to BNPL as interest rates rise and borrowers pile debt on top of debt.

Pros and Cons

It’s clear why BNPL became popular — convenience and flexibility. The term of the loans can vary from shorter- to longer-term, and most come with no interest attached. Easy-to-use BNPL offerings help consumers play a more active role in managing their finances, as borrowers often try to align installment payments with pay periods. 

However, while installment payments may serve as a healthier form of debt if used correctly, BNPL is not without potential risks. The ease of use makes it simple for consumers to spend beyond their means. Users can make multiple BNPL purchases through a host of merchants leveraging multiple platforms, which can lead to difficulty keeping track of and making payments. This practice can contribute to delinquency and credit risks, raising concerns as major providers report their loans to credit bureaus. 

Credit Union Considerations

Installment payment plans remain popular despite uncertainties, and BNPL offerings are becoming table stakes for many financial institutions. PSCU’s 2022 Eye on Payments study found that BNPL utilization was 60% among consumers who know their provider offers a BNPL solution, indicating significant consumer interest and engagement with BNPL. Credit unions should strongly consider the BNPL market when it comes to growing their portfolios, attracting new accountholders and offering more solutions to their members. One key indicator is to pull transaction details from the top three BNPL providers to understand how often your members are using them.

To create a BNPL offering, credit unions should first evaluate and choose an installment plan solution through a vendor, preferably one that specializes in BNPL. Installment plan offerings include several options, including pre-purchase, at-purchase and post-purchase plans. Pre-purchase plans require consumers to opt into installments before making a purchase. At-purchase plans prompt consumers to pay with installments during checkout. Post-purchase plans allow consumers to convert a recent credit card purchase into installments, but require merchant integration. For a credit union's first BNPL offering, pre-purchase or post-purchase plans are recommended, as they provide card issuers greater flexibility based on cardholder history, existing credit lines and regular interactions.

After selecting and implementing a solution, credit unions should strategically promote their credit or debit card as the card of choice for members interested in installment plans. This will drive increased deposit balances, interchange revenue and overall brand visibility.

Education is Key for Members 

It is critical to provide education about BNPL’s benefits and risks to your members to ensure that they do not overextend themselves. Providing guidance on BNPL as another budgeting tool that may benefit their overall financial wellness will help strengthen your members’ trust. Members who are fully informed and financially healthy are more likely to be satisfied with their credit union as their primary financial institution and are more likely to rely on their credit union as their trusted financial partner now and in the future.

Not all BNPL providers are created equal. It is important to ensure that the BNPL solution you choose to offer is more of a benefit than a risk for your members’ financial wellness. Many well-known providers do little to pre-qualify consumers and do not conduct credit verification, resulting in high delinquency and loan over-extension. Consider partnering with a trusted, credit union-focused BNPL provider like PSCU to leverage their analytics and meet members where they are in their financial journeys. 

Some providers offer installment payment solutions with customizable options, allowing financial institutions to decide how to offer the product to their cardholders. Credit unions can define their own qualification criteria and customize their installment plans. Those installment plans that present as a post-purchase option using cardholders’ pre-approved credit lines, reduce overspending risk. Post-purchase installment plans become a budgeting tool for cardholders, empowering users to make purchases with the flexibility to decide how and when they pay.

Only time will tell if BNPL offerings will evolve and whether their current popularity will remain. If your credit union is looking to attract new members, strengthen trust and expand your offerings, choosing the best BNPL option for your unique circumstances is essential to providing your members with flexible and manageable payment options. 

Cody Banks leads PSCU’s payments, fraud, loyalty & contact center product teams. In his role, Banks focuses on developing and delivering safe, easy and convenient payments experiences for the company’s Owner credit unions. Prior to joining PSCU in 2017, Banks spent nearly 10 years in the credit union industry navigating complex initiatives with a focus on journey mapping of the member experience.