BNPL has grown exponentially and can allow banks to provide greater flexibility to existing customers but also allow fintechs to further entrench themselves as competitors for business.
BNPL: Can Banks Compete?
Buy Now Pay Later is entering the mainstream. The rapid growth of eCommerce – which has only accelerated in the COVID era, has driven transformational changes in the payments industry and raised the expectations of consumers regarding accessibility. Consumers are increasingly seeing new, more flexible, and convenient payment models to provide options to define payment terms of their choice. The BNPL installment approach has exploded over the last 12 months and is being viewed as a way for banks to provide greater flexibility to existing customers but also for fintechs to further entrench themselves as competitors for business.
Advantages of BNPL
Boosts Online Conversion Rates – Merchants who have adopted BNPL options have seen an increase in online conversion rates as it helps customers better manage their monthly income and expenses. A recent Klarna study indicated adding BNPL at checkout resulted in a 7% higher conversion rate versus traditional credit card options. Consumers can now take advantage of payments on their terms and not have to be tied to one bank or credit card to do it.
Encourages Larger Ticket Sales – BNPL is becoming increasingly popular as a means for consumers to purchase larger ticket items such as appliances and TVs through management of payments with no or low fees or interest. Merchants are able to attract new consumers who may be unbanked but qualify for an installment and are able to do so at a lower cost. This in turn will allow merchants to reduce reliance on discounts.
Improves Customer Loyalty – BNPL offerings allow merchants to build a relationship with customers who might not be able to make a purchase otherwise. This seamless purchase experience can lead to increased sales as one BNPL player Affirm, has discovered offering flexible payments can increase repeat purchases by as much as 20%.
Recent Market Developments
Klarna’s recent announcement it will offer its BNPL services to Stripe merchants - two of the largest fintech’s joining forces – is only the latest in a series of deals that demonstrate the continuing evolution of the market and will support its growth.
Other recent deals include Square’s purchase of Afterpay, PayPal’s acquisition of Paidy, Amazon’s recent announcement that they will be offering Affirm loans to customers as well as Discover investing in Sezzle.
Meanwhile, Visa has continued to attract partners to support its Visa Installments Solution, which it has been piloting in various markets since 2019. Al Kelly, Visa’s Chairman and CEO in a recent earnings call acknowledged the spate of fintech partnership announcements but noted installment loans currently represent only a small fraction of the estimated $100 to $150 billion in annual payment volume. Visa intends to drive growth in installment lending over the next few years by becoming the critical connector between financial institutions, fintechs and merchants to offer installments to the largest possible number of consumers. Visa intends to bring scale by allowing issuers to offer BNPL loans to existing card customers through bank portals while allowing merchants to offer the Visa installment Solution at point of sale.
Visa’s most recent partners in this space will be FIS and the Canadian acquiring firm Moneris while also extending its existing partnership with Klarna to more worldwide markets.
Mastercard has developed Mastercard Installments, enabling banks, fintechs and lenders the ability to offer BNPL. Mastercard is working with Fifth Third Bank, Galileo Financial Technologies, SoFi, and Synchrony, to name a few. Craig Vosburg, Chief Product Officer at Mastercard, stated, “At the heart of it, payments come down to choice – and people want more from their money with greater flexibility and control in how they pay and where they shop.”
Mastercard Installment allows customers to digitally access BNPL offers through pre-approvals or instant approvals at checkout. Pre-approvals can be directed to a merchant’s website and stored in digital wallets to be used online or in-store wherever Mastercard is accepted. Vosburg went on to say,” it is a digital-focused way to pay today and tomorrow, delivered through the consumer’s most trusted relationship with their banks and other lenders, at merchants of their choice.”
Implications for Banks and Issuers
While the recent fintech partnerships are meant to try to keep banks from the market, large issuers such as Barclays, Chase and Capital One have been steadily advancing their own offerings in the space. Banks will need to balance the low costs often affiliated with installment plans as consumers seek those with low interest rates or nominal fees for utilizing these payment plan options.
The threat these BNPL partnerships present to banks isn’t really about taking revolving credit business away. Rather, it appears the Klarnas, Afterpays and Affirms - who are already popular with merchants - are attracting new users in new segments, which should benefit more established players as well if they are in the game. Not offering BNPL may be more of a lost opportunity for growth rather than a challenge to revolving consumer credit which exceeds $1 trillion in the U.S. market alone according to Mercator.
Installment solutions provide the infrastructure for issuers to take advantage of an opportunity to attract spend dollars and consumers. Meanwhile, a huge component of most household’s credit card spend goes to travel, lodging and other leisure activities such as dining out. While many of these activities have been stifled in the last two years, predictions are banking on the pent-up demand to drive significant increases in consumer spending during the coming holiday season. Bank issuers can and certainly should capture some of this spend by including BNPL solutions as part of their card features.
Participating in this market growth should be a primary focus for banks and issuers of all sizes. Customers will expect it and maintaining a deep and trusting relationship with clients may depend on being nimble enough to be there to support their needs.