Banks Could Be the Future of ‘Buy Now, Pay Later’ Lending

As fintech lenders offering 'BNPL' push more debt onto more consumers, traditional regulated financial institutions may become a more attractive alternative — if they start figuring out what a bank version of online installment finance should look like.

Between the summer of 2019 and the summer of 2020, the number of consumers who had reported using Buy Now, Pay Later services increased by 50%, and the trend continues to grow.

Retailers choose to adopt these solutions once they realize consumers are more likely to pull the trigger on large purchases if they can be restructured with little friction into smaller payments to eliminate the burden of spending a large sum of money outright.

Younger consumers — particularly Gen Z and Millennials — have taken to BNPL. They find making monthly payments on a high-interest credit card unappealing and perceive BNPL as a preferable alternative that gives them more control.

Retailers seeking to add the attractiveness of convenience to their shopping experience might consider partnering with a BNPL service like Klarna, Afterpay or Four. However, these services have drawbacks that must be considered.

Does an Opportunity Await?

The reasons that give these new fintech services their consumer appeal might be the very same reasons traditional consumer lenders — especially banks — stand to succeed in the BNPL industry in the long run.

Are the Days of Fintech BNPL Numbered?

Most BNPL services are primarily tech companies that don’t have to face the scrutiny of federal banking regulators when it comes to the amount of debt they issue and to whom. Over time, it’s inevitable that unregulated institutions issuing debt stand to expose themselves to more risk than their regulated counterparts by the very nature of that lack of regulation.

In Europe and Australia, for example, consumer groups are beginning to push back against BNPL fintech, arguing that these unregulated lenders are able to sell up to $30,000 in installment debt to consumers based on algorithm-driven approval processes. This can leave consumers suddenly sitting under an avalanche of debt they may not have realized they were accruing — and are unable to pay.

Banks have been late adopters to the technology behind BNPL payment programs, but once they adapt the necessary software needed to compete, they will begin taking share of market from BNPL fintechs.

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How to Keep BNPL Programs Safe for Both Consumer And Lender

The main appeal that BNPL services offer consumers is their promise of transparency and certainty. Consumers want to know that the smartphone or couch they’re purchasing costs “X,” which means they’re required to pay “Y” installments, and if they don’t pay in 90 days, “Z” is what they will owe.

This simplified contractual method of breaking up big purchases means consumers don’t have to factor an interest rate across multiple credit card purchases over time, by comparison.

What to Watch:

Where banks differ from startups in the BNPL industry is how they can apply a measured amount of pressure to the “frictionless” approval process in order to shield shoppers from making a bad decision that ultimately leads to them incurring too much debt.

Because banks are regulated, both lender and consumer would be provided an additional degree of safety when chopping up purchases into repayment agreements.

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Waiting for the BNPL Opportunity to Blossom

There are arguments against BNPL. Traditional lenders might not want to offer loans on $50 to $500 purchases and would be inclined to leave those smaller transactions to fintechs. And they would likely avoid lending to consumers whose credit scores pose too much risk. Retailers might find the fees associated with BNPL services too high to be considered justifiable. And stores that issue their own credit cards might feel that BNPL options would cannibalize those programs.

In addition, by making it easy and appealing to shop, customers ended up with obligations on multiple individual small loans adding up to amounts that aren’t necessarily easy to pay back. This has spurred some banks to bar the use of credit cards to pay for BNPL transactions.

The reputation among consumers that some BNPL programs are building may catch up with fintechs in time. This could allow traditional banks to step in, potentially offering better BNPL programs for consumers.

Banks can afford to play the long game. Retailers will make the switch to more secure lenders once they know better options are available. And some smaller retailers who may worry about getting stuck with bad BNPL debt if the fintech lenders get into trouble may be more willing to partner with financial institutions.

Fintechs are currently winning the battle, but banks will win the BNPL war. One reason is that as the fintech innovators become mainstream, they will likely be held to regulatory scrutiny. Traditional lenders, able to use deposits to fund loans, will be able to compete by offering better interest rates to merchants and consumers.

Additionally, traditional banks’ lending processes should prevent more consumers from taking on bad debt, which will offer safer transactions for lenders, customers and merchants. Competition and innovation drive the financial services industry, and as new trends in tech gain widespread adaptability, cutting edge solutions will always emerge to replace old ways of doing things.

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