Banks can still win the Instalment Lending Game

Buy Now Pay Later (BNPL) is a modern twist on a tried and tested instalment payment method that has taken the world by storm and grown at an incredible rate in recent years, catapulting a number of relatively new entrants into unicorn territory.  Today, BNPL already accounts for 8% of eCommerce transactions globally.  BNPL as a category is expected to grow at a 32% annual rate and is projected to make up 17% of the global digital commerce market by 20231.  COVID-19 has certainly been a catalyst for growth for BNPL payments, and the shut-down of physical retail in favor of eCommerce and card-not-present payments during the global pandemic is likely to accelerate this growth even further.

The BNPL market is currently dominated by non-bank FinTechs, most of which are ‘new account’- based systems that make their revenue from merchant rates.  The perceived upside for consumers is clear – as long as you pay your instalments on time, there are no consumer fees to pay. The user experience is typically frictionless and mobile / digital first.  Also, many of the BNPL providers play eloquently into the anti-bank sentiment that has prevailed in many markets following the global financial crisis (2007 – 2009) and the resulting aversion to debt of younger customer segments. Perversely, BNPL can be seen to be introducing a new form of debt to the world economy that is not always tracked by regulators in the same manner as other debt instruments. 

Nonetheless, it is apparent that (a) many younger consumers favor BNPL over traditional credit cards, (b) non-bank FinTechs are winning in this game and (c) merchants – desperate for growth – are prepared to pay the relatively high merchant fees for BNPL transactions.   BNPL is filling a need for which there is clear market demand. 

BNPL solutions appeal to various stakeholders in the digital payments value chains because:

  • For merchants: it provides a convenient payment method that is clearly favored by credit-averse younger consumers. In most cases, merchants get their cash upfront so they take little or no credit risk.
  • For consumers, there typically are no interest or fee payments involved: BNPL companies make the majority of their revenues through merchant fees. As such, consumers are typically not charged interest or fees for the period of the payment schedule (as long as instalments are paid on time). A fee is typically charged for late or missed instalment payments.
  • Access to products immediately: Unlike lay-bys, consumers can have access to their purchased product or service immediately whilst they pay it offover time in multiple instalments

In the meantime, banks are being cut out of the loop as they are not participating in BNPL ecosystem, losing out on interest income, fee income, interchange revenues, and tighter linkages to their customers and/or merchants.

The game is not over yet, though, and there is still significant growth opportunity for banks in the BNPL market by leveraging traditional payment instruments as a delivery mechanism for BNPL.  Banks enjoy some structural advantages over BNPL companies that provide opportunities to not only catch up, but possibly even leapfrog BNPL FinTechs and win the BNPL game. Some of these advantages include:

  • Access to all merchants: via the international (and/or domestic) card schemes, banks have access to all merchants that accept digital payments (and not just the merchants that have signed up with the relatively young BNPL players). As such, banks can offer BNPL services on existing credit (and debit) portfolios, simply by allowing the customer to pay down the purchase in instalments. In addition, since banks have access to the consumer’s transaction history, they can price for risk, making it attractive for both consumers and merchants. In this scenario, consumers get the benefit of using BNPL at all merchants that accept digital payments. For banks, making the changes to core payment systems is hard and expensive and in the current environment of risk mediation it is difficult to get the capital and resources to develop the solution in-house. It is important for those banks that want to win the BNPL game to know there are proven partnership technology solutions available that make it fast, safe and cost-efficient to deploy BNPL solutions on existing card products and portfolios.   
  • Ability to combine transactions into BNPL: Given the transaction history available to them, banks can enable consumers to combine multiple credit or debit card transactions into a single BNPL payment plan, before the transaction takes place or after. Via a simple mobile app interface, consumers can opt to pay future or historical purchases down in instalments.
  • Selection of payment plan: Banks can provide more flexible payment plans than some of the existing BNPL players can provide. This can be configured by the bank based on risk appetite, consumer credit risk history, merchant (type) or amount being placed on a BNPL transaction.
  • Enablement across already existing customer bases via existing card portfolios: Banks can have large consumer bases, and this can be used to their advantage in getting market traction by enabling instalment lending across multiple (credit and/or debit) card portfolios quickly. This can be staged based on card type or based on risk appetite.  Importantly, banks can provide BNPL solutions without having to issue incremental credit lines but rather leverage the existing limits extended to risk-scored consumers.
  • Ability to price much lower: Banks have natural costs of capital that are generally lower than non-bank FinTechs, and therefore have an ability to price at lower rates & fees.

Banks can still win the BNPL game. They need to realize that the technology is readily available to help them quickly deliver BNPL services to market by partnering with technology providers who can enable BNPL at relatively low cost, bank-grade security and in short implementation timeframes.

It is highly unlikely that incumbent banks can win this battle by themselves due to legacy systems, risk aversion and internal process and capital restrictions.

BNPL as a category will undoubtedly continue to grow significantly in coming years. The question is – will banks continue to let themselves be disintermediated by BNPL providers or will they take steps to capture their fair share of this lucrative BNPL market?

Source: WorldPay Global Payments Report: https://which-50.com/buy-now-pay-later-market-to-double-by-2023-report/

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