BNPL’s Newest Trick: Cutting Out the Retail ‘Middleman’

Buy now, pay later (BNPL) is a consumer credit solution typically sold to retailers who then allow eligible consumers to use it to pay in installments.

But what changes when a BNPL business provides its solution straight to consumers rather than retailers? Quite a bit, in fact — and some are calling it BNPL 2.0.

As Philip Belamant, CEO and co-founder at Zilch, told PYMNTS as part of our “Commerce Voices” series, it comes down to the battle of the buy button, and how switching up the payment dynamic in this way affects sales.

“If you look at [recognizable] BNPL [1.0] or point-of-sale finance buttons, these checkout buttons, they engage directly with retailers,” he said. “Their customers are principally retailers. Our goal [at Zilch] is to bring … an embedded finance solution to a customer and let that customer carry this around and pay however they like, wherever they like, for whatever they like wherever they go, regardless of what the retailer has done.”

Putting consumers in control of their BNPL spend via the Zilch virtual Mastercard is the “how” in this new scenario, and there’s more than one answer as to the “why” involved in taking this approach.

Belamant said, “Retailers are worried about price, they’re worried about conversion, because [BNPL 1.0 organizations are] really just a service provider to the retailer. [They] don’t necessarily bring them customers. [They] help them better service their customers.”

As a virtual card stored in the Zilch app or an Apple, Google or Samsung Pay digital wallet, that all gets flipped.

See also: Zilch Expands D2C BNPL With Cashback Rewards in US

“Brands almost see Zilch as a super affiliate provider,” he said. “We have millions of consumers that use our product, and we can place [a] brand in front of our customer and put [them] front and center with whatever offer [them] want to make, what [they’re] selling, why [they’re] interesting and why [they] you are better than those around [them]. We can drive customers through to [merchants] in that regard.”

Zilch is fluent in buy button, BNPL 2.0 and the checkout experience, as well as the problems brands are facing in having to map a new sales landscape sans ad tracking.

Saying “the cookieless world has arrived” and citing a figure that Apple’s cookie move has already cost Facebook and others up to $18 billion in ad revenue, Belamant said brands are taking a hard look at how to maximize their marketing dollars.

Who’s the Customer?

Belamant told PYMNTS that Zilch’s BNPL 2.0 approach is bringing about a new kind of discussion with retailers, including having some different people in the room than before.

“The conversations we’re having with brands now are more with the marketing teams, the affiliate commission teams, on how many more sales can we bring, how many leads can we bring and how do we convert those leads into sales [on our consumer platform],” he said.

Compare that to the buy button contingent and those using traditional point-of-sale (POS) BNPL 1.0 from the pure-plays and PayPals of the space, where negotiations revolve around better program pricing terms, how many instant loans they’re making, the POS and what the user experience is like.

Underlying all of it is access to credit and the cost of using it. That was a core consideration in Zilch’s formation when the team looked at short- to long-term credit debt figures and saw a greater opportunity.

“When we set out, we said to ourselves, [there’s] a $1 trillion dollar problem across the U.S. and the U.K., and that is called credit,” Belamant said. “It’s debt. And [customers are] paying about $140 billion a year in fees and interest to credit card companies to service their debt.

“It’s hugely expensive and in today’s world where we have so much customer data, visibility and technology, it’s simply unnecessary to charge people so much for so little. We set out [saying], ‘How do we make that zero? How do we go and fund some different way?’”

The result turned out to be a virtual Mastercard and super app requiring no retail integration whatsoever, enabling Zilch consumers to use the card anywhere Mastercard is accepted — at more that 37 million merchants — as they would any payment card. It uses open banking artificial intelligence (AI) and consumer data to determine credit limits.

Related: BNPL Provider Zilch Raises $160M for US Business Growth

Zilch uses a unique blend of world-class CRA data, live open banking data and its own proprietary behavioral data technologies to make active consumer lending decisions. This creates a 360-degree view of a customer’s affordability at any given time, ensuring no customer is lent more than they can afford to repay.

“The aspiration was similar to something like a Google or a Facebook, where [both businesses] gave us all something that has become part of our daily lives,” he said. “It’s value adding to us. On top of this, you can overlay an element of commerce and that allows a buyer to meet a seller, or vice versa.”

Piggybacking on consumer’s love of debit for spend management and their love of credit for the rewards and protections it offers, Belamant said Zilch’s BNPL 2.0 style uses the best of both, amortizing consumer credit with ad dollars coming to the platform as offers pushed out to Zilch Mastercard holders.

“We can do double what Chase might give you in cash back on a debit product for your daily spend, because we’re monetizing this through ad dollars with brands that want to consistently speak to potential buyers and those doing routine transactions,” he said. “At the same time, we are able to give customers free credit [by] using ad dollars to amortize the cost of credit to zero for them.”

Here Comes the Law

While companies like Zilch disrupt their markets, they’re also facing a new era of regulation around FinTech credit products that have the potential to slow their progress. As Belamant sees it, however, it’s somewhat inexplicable that this area of consumer credit has gone unregulated for as long as it has. In fact, he doesn’t think that’s good for business.

“We believe that you should offer the customer the protections they would expect from any traditional debt instrument that they were to be provided,” he said, adding, “The other thing is we genuinely believe that anyone who might be onselling this should be licensed and regulated to do so, because you are onselling what should be a regulated product.”

Why would he be a fan of regulation? Certainly, to protect consumers, but also partly to shield companies like Zilch from the dangers of dealing in data, where missteps are expensive.

Belamant said BNPL “is a debt instrument, and therefore you’re a broker of credit or debt and you should be licensed to onsell that debt. We really do have a fundamental problem with companies that are principally checkout buttons that have not gone via the formal and responsible regulated route.”

In the U.K., Zilch gained a Financial Conduct Authority license after 12 months of intensive work with the financial regulator as part of the Regulatory Sandbox Programme, reinforcing the business’ ethos to have regulation at its core. That is one of the reasons it has partnered with Cross River Bank in the U.S. to operate nationally, having also procured a California lending license.

It’s this important move that’s given the company a lot of confidence in how it’s viewed by regulators on either side of the pond.

Further validation of BNPL’s prominence with consumers can be seen in the entry of main street banks, as Chase, Citi, NatWest and Santander in both the U.S. and U.K. have recently entered the space. Additionally, from the world of technology, brands and customer-first companies, Apple announced in May that it’s entering BNPL with Apple Pay.

“If you look at the market progress Apple made with their card product from launch, maybe they’re 2% of cardholders now in the U.S., and that’s after four years, but Tim Cook researched the space for a long time and we’re pleased he chose to make Apple go BNPL 2.0, instead creating a D2C offering at 0% for new and existing customers,” Belamant said.

“We really think at Zilch we can carve out a major piece of this U.S. market out for ourselves … as it’s going to take a lot of Apple’s and a lot of Zilch’s to help bring that $140 billion down as near as possible to zero.”