The BNPL phenomenon and the untapped leverage for banks and financial institutions

Over time, you must have witnessed several financial developments and alternate ways to borrow and lend money. However, we are now living in an era of remarkable inventiveness, in which the Buy Now Pay Later (BNPL) business model has arisen as a game-changing lending option. These fintech applications have simplified purchasing and put financial independence at everyone’s fingertips, challenging the traditional banking and lending system. According to Fortune Business Insights, the global buy now pay later market is expected to increase at a CAGR of 22.0% from $30.38 billion in 2023 to $122.19 billion by 2030.

GlobalData predicts that the BNPL market will reach $309.2 billion in 2023 and grow at a CAGR of 25.5% from 2023 to 2026.

According to PYMNTs, 60% of millennials are interested in BNPL plans from their banks. The payment option has become a popular alternative among Gen Zs and Millennials.

Brands like VISA, Paypal, Openpay, Affirm, Klarna, Afterpay, Splitit, Sezzle, Latitude Financial Services, Flexigroup, Zippay, PayBright, Zip Co, Splitit, Laybuy, LazyPay, Simpl, ZestMoney, ePayLater, and EarlySalary, have emerged as disruptive forces in the financial industry. Up until now, non-financial brands have dominated the BNPL space by providing the service through merchants, primarily focusing on driving sales for retailers rather than prioritizing consumer support.

In light of the rising cost of living, many of us have grown accustomed to using Buy Now, Pay Later (BNPL) options for our purchases. Given its growing popularity, it begs the question: What is the present status of BNPL?
The Buy Now, Pay Later (BNPL) phenomenon has completely transformed the traditional consumer lending model, revolutionizing how customers pay for their purchases. The latest report from J.D. Power, released in May 2023, reveals an interesting trend: it is no surprise that customers facing financial strain are the most frequent users of Buy Now, Pay Later (BNPL) options, accounting for 55% of the total. However, what may raise eyebrows is that even customers with sound financial situations, comprising about 30%, opt for BNPL services. In contrast, customers who haven’t utilized BNPL in the past 90 days show a different pattern: those already overextended and experiencing stress are less likely to be acquainted with these products.

Notably, only 31% of the population claim no knowledge about BNPL, indicating considerable familiarity among the majority.

However, this approach has attracted regulatory scrutiny from the US govt regulated Consumer Financial Protection Bureau (CFPB) due to concerns over responsible lending practices. These non-bank providers often offer BNPL services based on limited customer data, potentially exposing the provider and consumer to higher risks. As the CFPB investigates non-banks’ practices regarding underwriting, credit bureau reporting, data privacy, and disclosures, financial institutions have a golden opportunity to enter the BNPL market with a more informed and responsible approach.

By contrast, incomplete or absent reporting by non-bank BNPL providers to nationwide Consumer Reporting Companies (NCRCs) has been a common practice. This approach, which focuses solely on reporting negative information such as late or missed payments, harms BNPL users. Payment history contributes 35% to a consumer’s credit score, making timely payments the most significant factor in improving scores and gaining access to affordable credit. Therefore, BNPL providers must report positive data that supports consumer financial well-being.
Will Financial Institutions Pave the Path? Exploring the Role of Traditional Banks in the BNPL Landscape.

How does the absence of a BNPL option at checkout contribute to increased instances of cart abandonment? Financial institutions have a significant advantage in offering BNPL due to customers’ trust in their existing banks. Banks can leverage customer data to provide responsible and timely BNPL offers, promoting financial wellness. They are well-versed in credit assessment, regulatory compliance, and customer-centric management. This positions them ahead of non-bank providers, enabling them to drive profitable growth and retain customers. The appeal of BNPL spans generations and income levels, making it a compelling business opportunity for banks.

Traditional banks have slowly embraced BNPL, but they recognize its growing popularity. It makes sense for banks with a large customer base or partnerships with retailers with frequent mid-range purchases. As regulations tighten and consumer protection increases, some fintech may sell their BNPL loan portfolios to banks due to the regulatory costs involved, which are more manageable for traditional banks.

How does integrating IT solutions, such as mobile applications, web development, data analytics, and API integration, contribute to the effectiveness and growth of Buy Now, Pay Later (BNPL) services? Creating a mobile app for your Buy Now, Pay Later (BNPL) services is a crucial step towards enhancing user experience and expanding the reach. With a user-friendly and intuitive app, customers can conveniently access the BNPL services and explore online storefronts without leaving the app. This empowers them to utilize BNPL even at merchants where it is not directly integrated into the checkout process.

For instance, with the Klarna app, customers can use Klarna’s BNPL service at Amazon, despite Amazon not offering Klarna at its own checkout. Developing a dedicated mobile app opens up new opportunities and convenience for your customers, increasing their engagement and usage of your BNPL services. Also, data analytics and insights enable financial institutions to gain valuable information about customer behavior, preferences, and risk profiles and improve overall customer satisfaction. Integration with merchant systems is important for enabling BNPL as a payment option during checkout. API integration is crucial for connecting various systems and platforms, enabling secure and efficient communication between financial institutions, merchants, and customers. APIs facilitate data exchange and enable seamless transactions within the BNPL ecosystem.

The IT is fundamental in powering the technological infrastructure and capabilities required for successful BNPL services, enhancing user experience, data analysis, integration, and system connectivity.

Perspective

The future of BNPL holds great promise, and it will be fascinating to witness its evolution. It’s crucial for financial institutions, including banks, credit unions, and neobanks, to squeeze out the potential and seize the opportunity of banks’ untapped muscles in BNPL. Failing to do so could result in losing their most valuable customers.

The authors are Senior Vice President, Banking & Financial Services, and Vice President, Consulting-Financial Services at Indium Software.

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