24 January 2022 | Brief | Gabrielle Gean

Donate Now, Pay Later: Is It Raising the Bar for Fundraising?

With online retailing on the rise, the new payment method, Buy Now, Pay Later (BNPL), has emerged as an exciting new way to meet the needs of customers. However, it poses both opportunities and challenges. On the one hand, BNPL increases purchasing power, assisting customers in managing their finances by providing access to affordable, low-cost credit. On the other hand, concerns have been raised about how this phenomenon may affect fundraising, specifically regular giving. Will Donate Now, Pay Later (DNPL) be the new game changer in the fundraising world?

Our goal is to cut through the speculation and help charity executives, regulators, and analysts better understand this fast-moving space by estimating the size of the BNPL market in the UK, examining the benefits and challenges for donors and charities, and providing insights on how BNPL is likely to evolve within the retail and nonprofit industry. Our analysis can be boiled down to three key insights:

  • High demand stimulates sustained growth. According to CR Research, BNPL has evolved into an embedded digital payment option that was used by 51% of online customers in 2020. Among these shoppers, 45% of them used BNPL frequently (at least once a month or more). The value of transactions in the UK reached 5% of the e-commerce market or close to £6.4 billion, reflecting up to 70% annual growth. As BNPL appeals to a mass consumer market and expands in service across a broader range of use cases, the growth trajectory is expected to continue and evolve into a new payment method in other markets.
  • A key ingredient in charity’s growth strategy. Given the current emergence of consumer demand, donors may expect to be given the DNPL payment option. By enabling charities to accept donations in the fastest-growing way that donors prefer, charities can easily raise funds with less effort across all other fundraising initiatives.
  • Upheaval in financial payments. Over the last five years, there has been a rapid shift to digital, resulting in significant structural changes in the financial services industry. Donors’ expectations have shifted from traditional lending and payment products toward low-cost or free services with intuitive digital experiences. It is reasonable to believe that the generational shift toward BNPL is even more pronounced among younger cohorts, and DNPL may provide a new avenue to engage more younger donors. In the UK, BNPL has long thrived in various forms, including point-of-sale (POS) finance and mail-order or catalogue credit. Traditionally, such services have focused on providing consumers with interest-bearing loans (sometimes with interest-free periods) to make larger purchases more affordable.

The swift rise of BNPL

BNPL has been expanding at breakneck speed, whether measured in terms of transactions, users, or merchants. According to Worldpay, BNPL will gain more popularity and market share in the global e-commerce spend, increasing from 2.1% in 2020 to 4.2% by 2024.

Especially in Europe, the popularity of BNPL will grow the most, nearly doubling its share to 13.6% of e-commerce spending by 2024. Digital wallets and BNPL options will advance at the expense of more traditional payment methods, while charge cards, cash on delivery, and pre-paid services decline steadily through 2024.

Prior to the Internet, consumers would browse a store or a catalogue, select items, and decide whether to pay cash or take out a loan for the purchase. The main goal of this service was to allow customers to spend more by providing credit and the option of spreading out payments to manage their cash flow. This process evolved in tandem with the rest of the world’s transition to the Internet. The customer browses, chooses items, and is given payment options, including an instalment loan for the purchase. As a result, BNPL went digital.

Imagining ‘Donate now, Pay later’ for pledgers

With a comparable approach to BNPL, how will DNPL work for pledging? Using digital DNPL upon checkout, the financing option allows donors to choose their preferred amount to donate. Similar to BNPL, donors can decide the overall amount and instalment duration of each payment. This approach is akin to making a recurring gift, with the exception that DNPL has an end date.

However, understanding the realities of how people interact with BNPL products and anticipating similar products like DNPL in fundraising payment methods will be critical in diversifying payment services without jeopardising donor interests.

The art of fundraising with the science of buy now pay later

Given the growth of this payment method and the need for greater regulatory oversight, it’s useful to clearly define DNPL according to how it fits into the nonprofit sector and differs from other payments and credit products.

Comparing cards and digital wallets

These days, upon checkout, donors often see the same payment options: credit card, debit credit, or digital wallet, such as PayPal. These payment products are distinct, but increasingly overlap.

What could this entail for fundraising payment volumes? DNPL could potentially offer more than a checkout payment option and initiate a committed repayment duration; which may then correspond to the changing way Millennials and Gen Z pay. According to a Capital Economics report, evidence from the UK and around the world suggests that younger generations are less likely to use credit cards and other forms of debt.

According to the same report, debit card payment volumes have increased threefold since 2009, at a rate faster than credit card payment volumes. Keeping to this trend could mean further shifts in payment and donating behaviour as the younger generation ages.

Convenience and ease of use

DNPL offers other benefits that combine to make a compelling proposition:

  • Higher realised rate. When payment is perceived as a commitment, donors are likely to willingly fulfil the total donation amount based on their predetermined payment duration.
  • Wider presence. When DNPL is visible at the right pledge points across a wide range of donation websites, it becomes a convenient alternative to credit cards.

Risk and Challenges

As with all other forms of payment, DNPL carries risks that must be managed. Here are two of the most crucial issues.

  • Risk of lower lifespan and lifetime value. With a limited repayment period, there is a risk of donors not returning after completing the full pre-committed donation amount.
  • Impulse giving and vulnerable donors. A significant portion of charitable donations are made on the spur of the moment in response to feelings of generosity. Such acts of giving is a hasty common mistake, and likely to become a growing occurrence with the DNPL service enabling and fulfilling an immediate feel-good emotion.

Where do we go from here?

Looking ahead, we anticipate significant advancements in the adoption of advanced digital payments across the nonprofit industry. Digital payments, once regarded as a complex payment feature, are now a key strategic area for charities seeking to grow their donor base. It is now also necessary for charities that accept intersect payments to develop a DNPL strategy. Charities that combine cutting edge and flexible payment options with strong donor stewardship will be better placed to achieve their fundraising goals.

For payment providers, an appealing option is to develop embeddable, white-labelled solutions that allow brands to offer alternative payment methods to their existing and prospective donor base. We expect the next few years to hold great promises for digital payments and embedded finance in the UK and around the world.

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