By Michael Pierce, Commercial Director, Banking – Western Europe at FintechOS
Buy Now, Pay Later (BNPL) is, by definition, a challenger business model. It redefines aspects of payments and loans, without depending on traditional definitions of either. While the concepts of store credit and installment payment have been around for decades, the current growth in BNPL adoption and market competition can be attributed to rapid and permanent shifts in consumer expectations.
Launched by Klarna and a growing host of competing start-ups, key aspects of BNPL include:
- no-down payment and split payment options
- interest-free periods
- simplified eligibility and application requirements compared to traditional payment cards or credit qualifications, resulting in availability for a wider range of customers
- tight integration in a point-of-sale user experience context
- a digital-native approach to customer self-service.
BNPL continues to grow at an exponential rate. According to analysts at Bank of America, the sector is “Estimated to grow 10 to 15 times its current size by 2025, representing $650 billion to $1 trillion by 2025 worldwide”. In the UK, nearly one in four consumers have used a BNPL service, with 9.5 million shoppers say they avoid merchants without an BNPL financing solution at checkout.
With BNPL’s impressive expansion and consequent impact on established payments and lending markets, the entire established financial services industry is currently at a strategic crossroads: players can defend themselves against another mainstream fintech challenge. that they hadn’t fully anticipated, or they can “lean in” – learn from what has happened so far and join this new competitive space.
There are three contrasting business models through which banking and lending operators could choose to go after BNPL, depending on their strategic appetite, revenue goals, and how long they are willing to take to create new solutions. and put them on the market.
- Direct games or indirect partnerships
A very consumer-focused and digitally ambitious bank or lender may choose to quickly follow Klarna and other challengers directly. Essentially, this business model is to reverse-engineer Klarna’s product and roadmap and build a competing BNPL solution with a consumer-facing app, universal online payment integrations via virtual cards, and smart methods to deliver instant credit risk assessment at the point of sale. .
This approach is not necessarily limited to large banks with a global market, as Tier 2 banks and lenders may be more digitally nimble or possess niche advantages, such as regional or vertical specializations.
- Integrated loan
As BNPL becomes more standardized and the number of BNPL competitors in contact with customers increases, competition will shift to the design and availability of the consumer loan product itself. This will be to the advantage of established players, who are able to innovate in order to adapt to higher purchase (loan) values, different risk profiles and higher overall loan volumes. .
Lenders will use next-generation product platforms to create “headless” lending products that promise new revenue channels through retail and payment partnerships. The main design hurdle is bundling product risk and eligibility criteria so that they can be offered and instantly approved during the checkout process for end consumers, in order to set up “pay later” options. and payment. While the financial fundamentals of lending remain the same, product builders will need to embrace new ways of thinking about risk that prioritize acceptance and a seamless user experience, while maintaining an ethical, compliant, and scalable model.
The BNPL space is already changing the product design ideas of lenders to incorporate greater flexibility and dynamic logic compared to traditional loans. For example, new loans can be specially designed to be integrated into user experiences at the point of sale, with dramatically simplified application and onboarding processes, and a direct connection between loan money and merchant settlement. depending on the execution statuses. Lenders who innovate in integrated lending will see benefits within their own channels, as BNPL means greater automation, the ability to handle higher volume of transactions, a greater focus on quality digital self-service and greater flexibility and user-friendliness. Repayment Terms.
- BaaS 3.0
Banks that are focused on the BNPL space – or existing relationships with checkouts, e-commerce merchants or retail brands – will see an opportunity to provide credit and liquidity for the B2B side of BNPL, at an aggregate level, without having to integrate heavily into consumer-facing applications.
Not all financial institutions will want to create their own consumer-facing BNPL offerings, and those creating pluggable loan products for BNPL partnerships may find the partnership-based approach too restrictive. Banking-as-a-Service (BaaS) provides a more ambitious model of scalable growth in which established financial institutions can license their capabilities to a wider range of cooperating fintechs and non-financial enterprises, with a reduction to the case by case. adaptation and integration whenever a merchant or other non-financial business seeks to integrate their BNPL offerings (or other integrated loans).
As the BNPL becomes more constrained by regulatory maturation, BaaS models may become more important. Consumer-facing innovators will prefer to focus on differentiation and brand building through the design of digital experiences, while preferring to leverage the proven underlying technology and regulatory status offered by consumer-ready providers. trust.
Do not transmit BNPL
According to recent consumer research by FintechOS, half of consumers are open to having BNPL as part of their regular shopping habits, with BNPL adoption even more pronounced among young people: BNPL is the top choice for payments of one in five Millennials. Financial brands looking to stay relevant to growing Gen Z and Millennial consumers – and indeed digital users of all generations – need to add BNPL to their product and growth strategy. BNPL will increasingly become a growth engine for other credit and banking products, as well as a profitable revenue stream in its own right.
As the industry matures, regulation will create moats around BNPL’s business models. At the same time, business models will be tested and crystallize into more defined areas of competition that resist brands that come late and must fight to drive customers away from competitors rather than grow by attracting early adopters at a lower cost. cost. In BNPL, pioneers will reap heavy rewards, while more cautious financial brands may find they waited too late to join the new wave.