The pros and cons of BNPL in the travel industry

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By Harry White, Senior Business Development Manager at ECOMMPAY

Although Buy Now, Pay Later (BNPL) has existed in various forms for decades, the payment method has experienced a steady rise in popularity in recent years. eCommerce, in particular, has seen a surge of BNPL activity since the COVID-19 pandemic, with even tech giant Apple offering “Apple Pay Later” to its digital wallet implementation, allowing users to split Apple Pay purchases into smaller increments.

More than three-quarters of UK businesses (78%) expect the use of Buy Now, Pay Later to increase as the cost of living and inflation rises, according to market research by ECOMMPAY in collaboration with Censuswide.

As Buy Now, Pay Later continues to gain traction, we’re also beginning to see the payment method used in service-based industries such as travel and tourism. In this article, we look at the pros and cons of BNPL for travel businesses and give a brief overview of how the technology works.

What is Buy Now, Pay Later (BNPL)?

Buy Now, Pay Later is more or less self-explanatory: The payment method effectively acts as a point-of-sale loan, with consumers making a purchase and paying for it later in instalments. payment plans are usually interest-free and typically last between three or four months.

BNPL is especially popular with e-commerce retailers, where customers can usually opt-in to a payment plan with no more than a couple of taps on their screen. Most of the time, BNPL splits a single payment into three smaller chunks, with the buyer paying in instalments over the next few months.

How does a BNPL plan work?

When a customer initiates a purchase and chooses to pay in instalments, a soft credit check is automatically carried out via Open Banking API, collecting the buyer’s credit history. Soft credit checks have no impact on a consumer’s credit score and are completed very quickly, with results usually being received in seconds, with a maximum wait time of a few minutes.

  • If a customer’s credit history is clear, BNPL can be selected as a payment option.
  • The customer makes their first payment — usually a percentage of the total amount.
  • Payment of the remaining balance happens through a series of interest-free payments over a specified time period.

But what about the relationship between the merchant and their payment service provider? 
When a BNPL option is added to a merchant’s checkout page, the payment provider will receive a cut from the merchant for every transaction made using this payment option. In return, the merchant should see an improvement in sales conversion and an increase in the average spend per customer.

BNPL use in the travel industry

As the public returns to booking vacations as COVID-19 restrictions ease, an ever-increasing number of payment options are emerging to assist the industry’s regrowth, with travel companies steadily expanding the range of financial services offered to customers.

According to an ECOMMPAY survey of travel and aviation representatives made in 2022, the popularity of Buy Now, Pay Later is growing, with 94% of respondents noticing a rise in the popularity of this payment method. In addition, 51% of business leaders across various industries expect that stricter regulation of BNPL will only increase the popularity of this payment method.

The Buy Now, Pay Later model offers many advantages to travel companies, and many have already jumped on this popular bandwagon. However, the payment method isn’t entirely without drawbacks, and it’s essential to weigh up the pros and cons before implementing BNPL into your payment workflow.

What are the advantages of BNPL in the travel industry?

Here is a short list of the benefits of Buy Now, Pay Later for the travel industry:

  • One of the major benefits of BNPL is the financial protection it offers to merchants, as they receive payment immediately, leaving the BNPL scheme with the task of receiving instalments from clients. Even if the customer pays back their loan over a long period, the merchant will not be affected.
  • When a client pays through instalments, it can often prove easier to upsell to them than it would otherwise. For example, they might upgrade from a 4 to a 5-star hotel, go on holiday for longer, or be more willing to consider add-ons like guided tours. This means that merchants will often receive more money for an average purchase made with BNPL than other payment methods.
  • Another benefit of BNPL loans is that they provide clients with a greater variety of payment options. By providing customers with greater flexibility and choice, they are more likely to use your services. In fact, more than a third of businesses across various industries (36%) who offer Buy Now, Pay Later as a payment option saw a 41-50% increase in use during the pandemic, highlighting the growing consumer preference for this payment method.

What are the disadvantages of BNPL in the travel industry?

As promising as Buy Now, Pay Later schemes seem, there are a few potential drawbacks. Here are some of the things to consider before implementing this payment method: 

  • If you're considering offering this type of payment method, you'll need to factor in the time and money it will cost to integrate the service into your website. With no guarantee that your clients will even use the service, you can't know for sure whether or not BNPL is worth the implementation costs.
  • Certain "high-risk" customers may overspend when they use BNPL to pay for travel. While the BNPL service provider will be responsible for footing the bill, your company may still end up being associated with debt problems and high-risk clients.
  • As BNPL grows in popularity, stories continue to emerge about people getting into debt, creating a somewhat negative public opinion. The reality is that although personal responsibility has to enter the equation when a customer uses a BNPL scheme, providers are also responsible and have the power to inform and educate clients about the pros of BNPL and also the risks involved.

Questions still exist surrounding ATOL protection and refunds

In the retail sector, Buy Now, Pay Later has received a degree of negative press from frustrated shoppers, with some companies refusing to issue refunds and forcing consumers to go directly to the BNPL provider for reimbursement.For travel operators, ATOL adds an additional component to the refund equation that needs careful consideration. ATOL protection allows consumers to retrieve funds in the event of a tour operator failure. When a BNPL transaction is made, the tour operator receives the funds straight away, with the consumer paying instalments to the BNPL provider.  Whether and how this will be reflected in the ATOL scheme remains to be seen.

Missed payments and defaults 

In a scenario where the travel company is operating normally, but a consumer has failed to pay their instalments or defaults on a loan, then the BNPL provider would seek to recoup the lost money. 

Coming legislation

In the UK, government consultation is still ongoing on the subject of BNPL, and the lessons that can be learned from current retail cases. Legislation is likely to arrive in 2023, with the most likely scenario being amendments to Section 75 of the Consumer Credit Act 1974 to include BNPL, with providers ‘jointly and severally liable for any breach of contract or misrepresentation by the retailer or trader’ — though at present, specific details of how the law would apply to operators in the travel sector would be based on pure conjecture.

Final thoughts

With its rapid growth across many industries, and big players such as Apple and Paypal adding instalment-based options to their payment infrastructures, it seems inevitable that BNPL will eventually fully infiltrate the travel market. That means it's only a matter of time before BNPL becomes a must-have payment method for travel checkout pages.

However, as government regulation surrounding Buy Now, Pay Later tightens, choosing a reputable provider will become vitally important. Keeping a watchful eye on the retail sector may help to indicate where the legislation is heading, as well as gauging the level of negative opinion from consumers and the media.  

While BNPL can provide an effective means of spreading costs over several instalments, it’s essential consumers are educated about the potential risks of falling into debt. Regarding the pros and cons for businesses in the travel industry, the flexibility BNPL offers customers — and, therefore, the higher sales conversion rate it enables — will likely make this payment method an essential addition for travel agencies in the near future. However, consulting with your payment partner is vital to ensure you have the complete picture.