BNPL Is Loss Prevention With an Outsized Payoff
By Bryce Deeney, co-founder and CEO of equipifi
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Buy Now, Pay Later (BNPL) is small-dollar, high-frequency lending. On its own, a BNPL loan doesn’t move a lending portfolio the way a mortgage or an auto loan does. However, its ability to impact revenue and steer banking relationships in favor of institutional goals, is both real and understated.
The advantage of BNPL is in its relevance to everyday household budgetary decisions. BNPL targets transaction sizes within a range where consumers are willing to consider short-term, low-commitment financing. Currently, short-term loans average $135 and longer-term loans can reach $10,000 and higher. BNPL organically captures these high-relevance, high-conversion purchasing moments throughout the consumer’s financial lifetime. This is an enviable opportunity for any growth oriented marketing and revenue teams. And unsurprisingly, BNPL is available everywhere today as a mainstream payment product.
Yet for lending teams, BNPL has long sat in a blind spot. Manual servicing of high-frequency and small-dollar loans would be costly. Banks and credit unions that had created small dollar lending programs historically found them unprofitable due to the operational costs of running them in-branch with little to no automation.
Fortunately, automated and embedded installment lending is easily available today, and hundreds of financial institutions have in-house BNPL programs that are generating revenue. These BNPL programs are positioned for a more urgent strategic purpose: preventing deposit disruption and long-term attrition.
Need to Know:
- Fintechs treat everyday payment features, especially BNPL, as the entry point into a consumer’s primary financial relationship. J.D. Power research shows this is already driving measurable attrition, and only 3 of the top 10 U.S. banks by deposits currently offer an installment option that competes with it.
- Financial institutions already win on trust. J.D. Power’s latest BNPL satisfaction study gave bank programs a score of 704 out of 1,000, compared to 603 for fintechs. But usage tells the opposite story, with fintechs capturing 97% of BNPL activity to banks’ 3%, a gap that reflects presence, not preference.
- BNPL’s value goes beyond the loan. The larger payoff is the relationship it protects and deepens, and determines who keeps the consumer relationship today and where the next generation decides to bank.
BNPL is Crucial to Stopping Deposit Disruption
As Sean Gelles, J.D. Power’s former senior director of banking and payments, put it earlier this year, fintechs realized payments could be a backdoor to the deposit relationship itself, and they built accordingly. Debit cards, BNPL, digital wallets, and P2P transfers are being stitched into one app because to consumers, they are better as connected features. The result, as J.D. Power calls it, is “deposit disruptions.” Its data reveals that this disruption “is already causing measurable customer attrition among incumbents.”
Checkout was how BNPL companies like Klarna and Affirm got in the door with tens of millions of users, and they’re using that foothold to deepen wallet share, issuing debit cards, pursuing their own bank charters, and working to open up deposit relationships directly. Tony DeSanctis from Cornerstone Advisors tracks the startling growth of active fintech debit cards, approximately with 66 million debit cards today active from six fintech companies, all of which have pay-over-time products. “There is a fundamental shift in how consumers bank,” he notes. “If you do not adapt, you die.”
For financial institutions, this should be a wake up call.
An integrated institutional BNPL product is a crucial step of a defense strategy. Fintechs are using BNPL as their entry point into relationships financial institutions already hold. Offered first, in the place a financial institution already occupies, that same entry point keeps the relationship whole rather than losing a piece of it to someone else. That is a bigger payoff than any single loan line will ever show, and it’s available to any institution willing to meet consumers at the moment they’re already deciding how to pay.
The Financial Brand’s Chief Content Officer, David Evans, warns that “banks that fail to match these full-spectrum payment offerings face accelerating customer losses.” He suggests that “only those moving decisively to integrate competitive debit rewards, BNPL options, and strategic payment features will be able to successfully defend their deposit base.”
Purchasing Power Keeps the Relationship, Not Just the Loan
The primary advantage for most financial institutions with BNPL is deepening the relationships already there, consolidating a financial life that consumers increasingly want to hold in fewer places rather than more. Klarna’s latest earnings report showed that it had grown 27% in revenue. The same Klarna customers that started as short-term BNPL users were now using it for larger ticket spends. They now trust Klarna to provide them with purchasing power, and look to Klarna more consistently throughout their financial lifetime.
BNPL functioned as an entry point, not an end goal.
Fintechs are pairing BNPL with debit precisely because that’s where the everyday spending already lives, and it gives them a second point of contact with the same relationship. The hundreds of financial institutions who provide BNPL understand this, and are choosing to respond to consumer demand rather than yield to fintechs. Its significance shows up in the relationship built around a decision the consumer makes dozens or hundreds of times a year. Account holders know to turn to their financial institution for purchasing power.
That presence compounds into the relationship.
Banks Win on Quality, But Lose on Availability
When it comes to BNPL, banks are building the better product.
J.D. Power’s latest BNPL satisfaction study gave bank-run programs a score of 704 out of 1,000, up 59 points from the year before. Fintech programs scored 603, down 17 points over the same period. Financial institutions are winning on quality. However, the same study shows that fintechs still hold 97% of BNPL usage, with banks at just 3%, a gap that comes down to presence, not preference. Only three of the top ten U.S. banks by deposits currently offer a fixed installment option that can compete with BNPL at all, and not all three market it aggressively.
Meanwhile, the category keeps growing underneath everyone. J.D. Power found that 37% of consumers made a BNPL purchase within the last 90 days, a five-point jump year over year and the fastest growth of any payment method the firm tracks. Nearly half of consumers who switch a purchase to a payment plan have already made that decision before they even reach checkout.
That combination, rising demand plus a satisfaction advantage banks aren’t converting into share, is the real opportunity. It also means the fix is more straightforward than it looks. Financial institutions don’t need to out-innovate fintechs on trust. They need to make sure that trust is available at the moment consumers are deciding what to buy and how to pay, which for nearly half of consumers now happens before they even reach checkout, not after the fact when they’re reviewing a statement.
None of this requires the heavy lift it once did. Technology and automation have made BNPL easier for financial institutions to launch and operate than at any point since it emerged, and the programs largely pay for themselves while remaining profitable. Banks and credit unions are looking at weeks to months to go live, and not years.
But most financial institutions still underestimate who is actually using BNPL. David Evans warns that “many banking executives operate under dangerous misconceptions about who uses these products and why”. J.D. Power’s data shows BNPL users increasingly mirror the average American consumer, not the younger or credit-challenged niche many executives still picture. Most already carry credit cards. They’re choosing BNPL anyway because it gives them a clearer, more predictable cost for a specific purchase. And it’s happening on top of debit, still the single most-used payment method in the country, more common than cash or credit.
The Relationship Goes to Those Who Show Up
Fintechs got their opening through timing, not lending expertise. They showed up at checkout, then used that foothold to add debit cards, wallets, and eventually bank charters, working their way toward a deposit relationship they don’t yet fully have. Financial institutions still hold that relationship today. Keeping it means occupying the moment a consumer decides how to pay, rather than leaving that moment open for a fintech to fill.
BNPL decides who keeps the consumer relationships today, and where the next generation decides to bank.
