Buy-Now-Pay-Later (BNPL) Disrupted Payments, now Banking
The financial services industry loves its acronyms and the top one at the moment is BNPL, which stands for Buy-Now-Pay-Later.
This alternative method of checkout enables millions of customers globally to avoid paying interest on purchases by making equal (weekly / monthly) installment payments. If you’ve made an online purchase in the last year, you’re probably familiar with the companies that offer these versions of “traditional layaway plans” such as Affirm, Klarna, Sezzle, and AfterPay. We first discussed Buy-Now-Pay-Later last year in our Sector Spotlight series.
The data and growth trends on BNPL don’t show signs of slowing down from 2020. Boosted by the impact to shopping and overall spending behaviors during the pandemic, most consumers have tried the new payment method or know someone who has. Banks, retailers, credit card issuers, and other financial institutions are all taking notice and making rapid adjustments to their strategic roadmap.
2021 is set to be a breakout year for the Buy-Now-Pay-Later sector not only in terms of overall value and adoption, but in product reach towards other financial services (specifically banking). Here’s what we’ll cover of industry sector trends:
New milestones in growth for BNPL;
Top Buy-Now-Pay-Later companies with increasing valuations and app downloads;
How financial institutions respond with “Bank BNPL”;
Buy-Now-Pay-Later operators (and giant retailers) becoming banks;
THE RISING DEMAND FOR BUY-NOW-PAY-LATER fintech
Consumers are riding high on BNPL for its enhanced convenience, flexibility, and transparency in structure (with 0% interest or fees). Those individuals that use debit cards for purchases have their purchasing power enhanced (without credit checks) to make larger buys. Millennials and Gen Z consumers (both averse to credit) are the two groups who use BNPL most often.
Most shoppers in the US are familiar with installment BNPL:
Customers pay off the total purchase balance in bi-weekly or monthly plans; some providers require an upfront deposit;
For shoppers in Europe, invoicing BNPL is more common:
An individual can checkout with no money down and pay the total owed in a lump sum within 14 - 30 days;
In terms of traction and forecast for the Buy-Now-Pay-Later sector:
eCommerce sales climbed an estimated 44.4% year-over-year (YoY) in Q2 2020;
A compound annual growth rate (CAGR) of 13.23% (from the $285B estimated in 2018);
Global BNPL finance spending through eCommerce is expected to grow by 92% over the next 5 years;
$680B in transaction volume worldwide by 2025 (increasing from $353B);
As more consumers experiment with BNPL, expect the older age segments (above 54 yrs. old) to start adopting the new payment method and merchants to customize offers for this high net worth demographic.
BNPL SENDS SHOCKWAVES IN FINANCIAL SERVICES
As consumers and merchants pour into Buy-Now-Pay-Later programs, the operators facilitating payments and merchant partnerships continue to experience high growth themselves. Despite the pandemic, 2020 was a hallmark year for BNPL companies around the world.
The US leader in BNPL, Affirm, benefited with its IPO last month — shares increased over 100% on its first trading day and resulted in raising $1.2B. Overall funding growth for the entire sector since 2016: $1.7B.
The top firms are also significantly adding to their monthly app downloads. Klarna saw triple digit growth from 2019 (to over 106%) and competitors noticed sales spikes throughout 2020 of up to 200%.
Well-known financial institutions and large banks are modifying this model to their existing suite of products. “Bank BNPL” separates itself from the above programs because it’s connected to an existing, unsecured credit card.
A consumer with an eligible card can opt-in the program and choose which purchases in their transaction history should be on payment plans. The after-purchase option is sent as a notification (email or in-app). The current credit card players offering this are:
American Express through their “Pay it Plan it” feature;
Citibank - “Flex Pay”;
JPMorgan Chase - “My Chase Plan”;
As more banks familiarize themselves with Buy-Now-Pay-Later models, anticipate these options to become more dynamic and available at point-of-sale (POS) in order to directly compete with “FinTech BNPL.”
BUY-NOW-PAY-LATER (AND RETAILERS) ENTER BANKING SECTOR
One of the leading BNPL firms in Europe, Klarna, announced the launch of banking accounts in Germany. This is part of a company-wide strategy to become a financial “super app” — owning a customer’s primary banking relationship (e.g. salary deposits and bill payments) and providing budgeting insights. Klarna has already launched savings accounts in Sweden after being fully licensed in 2017.
Affirm and AfterPay have also launched high-yield savings to deepen existing client relationships. Loyal customers that actively use BNPL purchasing can essentially keep balances at these firms for monthly spend. Not only is this added convenience for shoppers, but an additional monetization path (from deposit interest revenue) for the fintech platform.
Buy-Now-Pay-Later companies have more customer volume, transaction activity, and higher monthly growth rates than many top neobanks. In Europe, N26 and other challenger banks can easily lose market share to a comprehensive banking offer from Klarna.
The shift towards banking in BNPL is part of a broader trend in eCommerce offering financial services. Most recently, IKEA announced a 49% stake in Ikano Bank — both sides already had partnerships with lending and cards, but deposit accounts may be next. Another giant retailer, Walmart, announced last month that they’re launching a fintech startup to focus on banking — the retail leader had previously applied for a banking license (in 2005), but cancelled their request.
OUTLOOK ON BNPL AND BANKING
With the innovation in FinTech and lower barriers in launching financial services, every Buy-Now-Pay-Later firm will have the ability to offer a banking product. Feeding off momentum in the industry and increasing consumer demand, BNPL platforms are experiencing more customer engagement than most banks and credit unions. The challenge lies in converting this engagement into a primary banking relationship — do shoppers trust these companies enough to handle all their monthly financial needs? For younger generations starting with their first formal account, the answer is likely YES.
The wider concern with Buy-Now-Pay-Later is still on consumer overspending. A payment structure that allows customers with limited (or no) credit to make larger purchases that they can’t afford may not the best long-term, financial decision. Capital One has already stepped up and said that they would block point-of-sale loan transactions on their cards due to the higher risk to customers and the bank.
BNPL as a payment model is still in its infancy and there’s not enough data to show a positive or negative impact on financial wellness. Regulators and established institutions will remain vigilant in protecting consumers from financial harm going forward, but the approach and timing is uncertain. What we do now is that Buy-Now-Pay-Later is here to stay in banking. //
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