Buy Now Pay Later (BNPL) has emerged as one of the most discussed and fastest-growing areas in consumer lending. What has been surprising is the unwillingness of many financial institutions to add it to their product offerings, according to a recent survey by IntraFi Network. Though BNPL upstarts like Klarna and Affirm continue to claim new territory, the survey indicates that 80% of community banks have no plans to add these services.
The Consumer Financial Protection Bureau (CFPB) has signaled increasing scrutiny of major players such as Affirm, Klarna, Afterpay, and Zip, leading many mainstream lenders to hit the pause button. Issuers have also expressed concerns that they lack the right tools to assess risk properly.
The good news for issuers is that the CFPB said its focus is on "accumulating too much debt, transparency, regulatory arbitrage, and data harvesting." While this could create headaches for fintechs, this type of oversight is typical for banks and credit unions. An effort by Equifax to add BNPL activity to its credit bureaus, along with new offerings from Visa and Mastercard, will give lenders a more holistic credit picture.
No Product is an Island
A majority of Americans say they would prefer to receive BNPL services through their FI, according to a report from PYMNTS.com. This is another welcome confirmation of the “trusted agent” status mainstream lenders still enjoy with the American public.
This advantage is far from assured over the long term, however. The primary means of establishing a trusted relationship is through a seamless experience - an area where fintechs are succeeding - and a demonstration of reliability. Upstarts can use this to offer more consumer products, such as Klarna's recent credit card introduction.
There is hope for banks and credit unions. Visa, Mastercard, and other companies are introducing products to directly compete with the fintechs at the point of sale, which could benefit traditional FIs.
One thing is clear: There is definite consumer demand for BNPL products.
Beware the Trojan Horse
It would be a fallacy to think of BNPL as a niche offering that appeals primarily to a small market segment and/or the low-credit score demographic. And while younger consumers – a fair number of whom have shown themselves to be credit card averse – have been the strongest adopters, BNPL acceptance extends across all age and income brackets. There is also evidence that some consumers may draw a psychological distinction between BNPL installments and “debt,” adding another twist to future marketing strategies.
Most younger BNPL adopters will eventually reach life stages that call for additional financial products like credit lines and mortgages. If banks and credit unions discount this threat, they could be forced to watch as consumers rely on fintechs. The line between FIs and fintechs is blurring more by the day.
The Bottom Line
While we believe BNPL is not right for all FIs, we think some issuers will find it an attractive product for landing new consumers...and retaining existing ones.
As consumers look for more financing options, BNPL could be another way for FIs to meet those emerging needs. Banks and credit unions should weigh their options before ceding more ground to BNPL disruptors capable of using the product to take market share away in other business lines.