BNPL: Why Banks and Credit Unions Need to Pay Attention

Financial institutions of all sizes are under pressure to find new revenue sources and solidify their status as customers' trusted financial advisors. One would think FIs would race to participate in a lending category projected to grow significantly in coming years – and one where 70% of consumers indicated in a recent survey that they'd prefer access through their bank.

That isn’t necessarily the case. Surprisingly, a study by IntraFi Network found that 80% of community banks and credit unions have no plans to introduce Buy Now, Pay Later (BNPL) services. A new SRM report details why FIs should closely examine this opportunity – not only as a revenue generator but also to defend current and future business.

It's About More Than Installments

BNPL is essentially a new spin on POS sales finance or short-term installment lending, though some platforms allow for larger purchases. It was initially launched to address certain potential limitations of credit cards in online purchases for select customers, although its use cases are rapidly expanding. Because payments are auto-debited or occasionally applied to a credit card, collections tend to be more straightforward than legacy consumer installment lending. Advancements in data analytics and artificial intelligence have made rapid underwriting and decisioning less onerous.

BNPL has tapped into an ongoing evolution in consumer payment preferences. Younger people are less likely to regard credit cards as their default option – if they have a credit card at all. Discretionary $100-$200 purchases may be hard to absorb as a single debit card charge, making smaller staggered payments – “Pay in 4" is a standard BNPL model – appealing. That said, don't compartmentalize the BNPL demographic – studies show reasonable levels of use among older consumers, as well as those with available credit card balances.

Once a fintech has an opening to provide BNPL services, it's an easy path to expand into other offers that compete with core banking products and services. Some BNPL players are already adding "Buy Now" buttons to websites and issuing physical cards.  

Playing the Long Game

Let's focus on the BNPL adopters in their 20s and early 30s. Many of those credit card-averse individuals will eventually need financial products like mortgages and lines of credit. It's not a stretch to envision "pure-play" BNPL providers like Klarna and Afterpay developing ongoing relationships with younger consumers, which will earn them the "first shot" at promoting other services.

Banks and credit unions may be reluctant to enter the BNPL fray due to credit risk, potential cannibalization of higher margin products, servicing costs, and the regulatory scrutiny looming over the space. However, there are countless variations of the BNPL model, and banks have already gotten comfortable with several of them.

Service providers such as ACI and Mastercard and issuers with strong merchant relationships are working directly with specific merchants to build financing options directly into their website workflow. Assorted flavors of BNPL are being tailored for small- and medium-sized enterprise (SME) financing, and the longstanding "rent-to-own" paradigm has also been modernized for a virtual setting.

Breakthrough products like BNPL rarely emerge fully formed – models are tweaked as glitches are exposed, and market concerns are raised. FIs are uniquely positioned to manage the compliance aspects and identify and avoid the riskiest pitfalls.      

The Bottom Line

As the new report explains, the rapid adoption of BNPL across age brackets – well beyond the younger demographic with which it is commonly associated – reveals a gap in the existing portfolio of credit solutions.

Banks should not regard BNPL as a niche product tailored to a specific use case but as a credit alternative that could become part of a broader customer relationship. The space will continue to evolve, but with a majority of consumers expressing a desire to engage through their FIs, it's time for banks and credit unions to take a closer look.

To learn more about this topic, please contact Keith Ash.