Credit Unions Well-positioned to Enter BNPL Market

Solutions Bring Convenience & Flexibility to Members

Over the past several years, evolving consumer expectations have served as a catalyst for payments innovation. From P2P to mobile wallets, and contactless to buy online/pickup in store (BOPIS), consumers have been open to trying new methods of payment to attain greater convenience, less friction and more financial stability.

Buy now, pay later (BNPL) is a notable trend that emerged during the pandemic, and it’s showing no signs of slowing down. BNPL meets consumers’ desire for greater convenience and flexibility in managing their household budget, by providing the option of repaying purchases made online or in-store over time.

The popularity of BNPL has grown to the point where consumers will soon expect card issuers and financial providers to offer such services, otherwise they will seek them elsewhere. To remain competitive and relevant to their members’ daily financial lives, credit unions must embrace innovation in digital payments and lending, and BNPL is one important element of that formula.

What is happening with BNPL?

BNPL enjoyed massive growth in 2022, adding a reported 28 million new users over 2021. Although BNPL services accounted for just 2% of U.S. e-commerce payments last year (according to FIS Global), they are rapidly growing in popularity. BNPL payment volumes are forecast to hit $71.9 billion in 2023, a nearly 20% increase over 2022. 

Aggressive marketing by BNPL providers like Affirm and Klarna has spurred much of this growth. Affirm recently reported a 25% rise in gross merchandise volume year over year, beating analysts’ expectations. The company also reported a rise in transactions per active consumer from 3.0 at the end of fiscal 2022 to 3.9 in its most recent quarter.

But the widespread popularity of BNPL comes with its share of risks for consumers, as well.

There is evidence that BNPL can lead to overspending if users are not careful. A 2022 survey from LendingTree found that 7 in 10 BNPL users spent more than they would have on purchases paid upfront, and 42% of users have made a late payment on a BNPL loan.

Late payments, in fact, are a more serious problem in BNPL than one might expect, given that timely payments form the basis of its benefits. Delinquent payment rates are three times higher for BNPL than for credit cards at 30 days past due and twice as high at 90 days past due.

This is particularly important since financially vulnerable households are nearly four times as likely to use BNPL as their financially secure peers, according to a major study by the Financial Health Network.

“For the consumer, using fintech BNPL providers like Affirm and Klarna introduces yet another financial institution into the mix, one where they don’t have a past relationship or experience to lean on,” said Nelson Fisher, Director of Product Development at Co-op Solutions. “It becomes even harder for households to manage their holistic financial picture, and where we might be seeing an increase in defaults or overextension. Using a BNPL solution through their trusted credit union can help alleviate that, while providing a better member experience for the user.”

This is why the Consumer Financial Protection Bureau (CFPB) has taken notice of the rapid growth of BNPL programs, with an eye on addressing “uneven disclosures and protections,” along with “data harvesting … debt accumulation and overextension.”

“Credit unions are in an enviable position,” Fisher says, “as they are able not only to better assess the risk profiles of their members, but also help them manage their financial picture more effectively than the competition.”

According to PaymentsDive, installment payment providers like Affirm, Klarna, Afterpay and Sezzle have begun tightening their underwriting standards in response to rising inflation and mounting losses. But startup fintechs aren’t the only competitors in the BNPL space. More established firms like Amazon and Apple have introduced their own versions of BNPL incorporated into their proprietary digital wallets, providing consumers with more options than ever before. In fact, Amazon and Chase recently announced plans to expand their BNPL services by allowing Prime Visa and Amazon Visa cardmembers to use the installment pay option outside of Amazon’s ecosystem.

Credit unions are primed to offer BNPL

We are witnessing a fundamental change in consumer behavior. Borrowing is moving closer to the point of sale and is becoming inextricably linked with the payment experience. This is why BNPL is resonating with so many; people want to be able to purchase the items they want, whenever and however they want.

This desire is fueling a convergence of lending and payments, with the eventual result being that the traditional personal loan may fall out of favor to the point of no longer being offered. For credit unions, this convergence is also driving a new definition of trust that is split between the traditional understanding that is defined more by “capabilities,” rather than “character.”

Whereas credit unions have long succeeded in character-based trust aspects like providing outstanding member service and consultative advice, the winners of this new financial revolution will need to both be able to deliver the right digital capabilities to meet evolving consumer needs, while responding quickly to such changing needs through continuous innovation and agility.

Above all, credit unions need to offer innovative payment solutions that support their members’ daily interactions. If not, credit unions will lose the long-term relationships that have been built on legacy products like checking accounts, auto loans and mortgages.

BNPL-type programs are one way credit unions can drive innovation and meet members where they are today. They also serve as an evolution of the traditional personal loan, which is losing favor in today’s marketplace.

For credit unions, BNPL programs represent a new way to activate and grow market share and net income. They increase the value of credit portfolios, leading to higher acquisition and retention rates—ultimately paving the way for the credit union to become or remain the member’s primary financial institution for daily interactions.

Credit unions are well-positioned to offer their own version of BNPL, but with the “credit union difference.” They know their members intimately and can offer solutions that fit their unique needs, with benefits catered to credit unions. Moreover, the installment-loan characteristics of pay over time programs make them a less risky option for lenders than open lines of credit that allow borrowers to carry balances in perpetuity. For a credit union member, participating in a well-designed BNPL program at your home credit union means you are essentially “borrowing from yourself.”

Co-op Pay-Over-Time Transactions—BNPL designed for credit unions

To meet this market need, Co-op has been busy developing Pay-Over-Time Transactions, a solution that empowers members with the control and flexibility to pay for select transactions over time, giving them peace of mind in support of their lifestyle and their financial wellness needs.

Built by Co-op exclusively for credit unions, based on input and feedback from the Co-Creation Councils, industry partners and a Client Task Force, Pay-Over-Time Transactions offers unmatched configurability to enable credit unions to align lending risk profiles and customize the program for their specific needs. This will help to reduce the risk of delinquent payments and default, while providing members with the immediate access to create flexible payment plans for transactions that have recently posted to their credit card account. This post-purchase BNPL solution is a double-down on the member to credit union relationship.

Credit unions can easily configure and manage their Pay-Over Time-Transactions program through Co-op’s simple-to-use Springboard^® application, and fully integrate it with leading digital banking providers through APIs provided through the Co-op Developer Portal.

Without requiring members to complete a time-consuming loan application process, Pay-Over-Time Transactions leverages the trusted relationship the credit union already has with its members. It is designed for credit unions, with members’ financial wellness at the forefront.

Pay-Over-Time Transactions expands the value of payments, the most common and frequent interaction members have with their credit union. As part of Co-op’s credit union digital ecosystem, this solution supports credit unions in their quest to acquire and retain members by offering a convenient new tool in support of their daily interactions and financial wellness needs.

Many credit unions have already expressed interest in Pay-Over-Time Transactions in anticipation of its release. Is your credit union ready to join them?

Co-op Pay-Over-Time Transactions is an important component of the full-service digital payments program designed for the future. For more information on this and other innovative digital payment solutions, contact your Co-op Business Executive, call 800.782.9042, or email solutions@coop.org.