Rough news for buy now, pay later companies around the world has slowed the rocket ride the emerging industry has been on.
Klarna, for example, announced in May 2022 that it needed to lay off 10% of its global workforce and raise additional capital. Affirm lost a major chunk of its stock market valuation in the U.S. In Australia, several chapters ahead of the U.S. in the BNPL story, multiple buy now, pay later companies have lost market valuation. In Australia, calls for a regulation of buy now, pay later are growing, and in the U.S. the Consumer Financial Protection Bureau is probing major BNPL players.
These trends have led to talk about BNPL as just another financial bubble, ready to be popped. On social media commenters have gloated over the industry’s state of affairs and some bankers no doubt have let out a sigh of relief over the prospects of losing a serious competitor to their highly profitable credit card business.
Back to consumer credit business as usual? Not likely, says Alyson Clarke, Principal Analyst at Forrester and a lead author of the firm’s BNPL report, “The Buy Now, Pay Later Opportunity.”
Clarke warns the traditional banking and credit industry not to see the BNPL companies’ current travails as a sea change. And she says they will want to develop their own responses to BNPL service, if only as a defensive measure.
“This period is not going to stop the buy now, pay later movement’s trajectory. When we look back on this period, it will be seen as a speed bump. These businesses are not going to fold.”
— Alyson Clarke, Forrester
Clarke says that “this will be a blip on the radar for them in the long run because of the momentum that they have gathered around the concept.”
Bankers have long beefed about the BNPL industry’s “wild-west” freedom to operate without a regulator, seeing it as unfair when products like credit cards and traditional installment loans are so heavily regulated and overdraft is increasingly being jawboned to death. Clarke says they cheer now that BNPL regulation seems closer.
“But the truth is that the larger BNPL players have long been thinking about being regulated and are already in conversations with regulators,” says Clarke. “So this is not like a massive surprise that’s going to turn the BNPL industry into dust.”
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BNPL Trend Is Much Deeper Than Pay-In-Four
Bankers who are taking comfort in the current situation don’t understand what’s been going on in BNPL, Clarke maintains. Traditional banks tend to see BNPL as a isolated business because they tend to treat their own businesses in silos, to this day, says Clarke. If an activity can’t produce profits in a couple of years, banks typically drop them.
Viewed that way, “classic” BNPL as practiced by players like Klarna, Affirm and Afterpay (acquired by Block) has generally been a losing business, according to Clarke. Even though merchants subsidized the interest-free deals, they have been pushing for the fees they pay to be lowered, she says, because the charges are much higher than the credit card interchange fees they are used to paying.
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It was never the intent of BNPL companies to stick to a single model. Already, the companies have been introducing other products, including credit and debit cards and even deposit accounts.
“I don’t believe the standalone firms were under the illusion that there wouldn’t be a point where competitive pressure and margin squeeze came together,” says Clarke.
Banks have worried about the competitive impact of BNPL options versus credit cards. But Clarke explains that the BNPL companies have been building ecosystems in which “they have been gathering raving fans.”
(As Chase officials noted during the bank’s investors day, payments innovations like BNPL sometimes drive additional traffic for banks’ existing payment tools. Many initial payments for BNPL purchases are made with debit cards.)
Part of the intent has been to develop customer bases that could be leveraged for other financial products. Beyond that, the customer bases themselves have become a product, with BNPL companies cultivating users through programs assisting merchants in marketing to those consumers in multiple digital formats. BNPL companies have grown to become ecommerce consultants, in some cases. And the cultivation of fanbases to mine data is already an established business.
“That’s why these firms have been spending so much money on branding and advertising,” says Clarke, “a lot more than a bank would ever even dream to spend, I expect.”
“They are looking to become shopping app and ecommerce platforms,” says Clarke. “They are looking at multiple revenue streams in order to make money.”
One of the strengths of BNPL companies has been that the consumer-facing side is working in concert with the merchant side. In Clarke’s experience the consumer-facing card operations at banks don’t always work in synch with the merchant operations.
Why Did BNPL Become So Popular So Quickly?
Clarke says the banking industry has to acknowledge why this modern take on the old idea of layaway sales become so popular in the first place.
“There was a consumer credit need that wasn’t being met by credit cards,” says Clarke. “People liked something that lasted slightly longer than the typical 30-days-to-pay of credit cards, that did not impact your credit score, and which you could use even if you had a thin credit file or even no credit file.”
The double digit rates that many consumers pay on revolving credit card debt border on “the insane,” says Clarke, and the model presented by pay-in-four BNPL and other variations offered a much more palatable alternative. She suggests that this option will prove even more acceptable as inflation bites harder.
“I think there could very well be a reckoning in four or five years on the rates consumers pay on credit cards,” says Clarke. Comparing 0% for BNPL versus 25%-30% on cards, “why would a savvy consumer carry a balance on a credit card?”
Some studies say that many people wind up paying penalties for late BNPL payments, and there is concern about people originating multiple BNPL plans, each with their own durations and payment dates, leading to defaults. In Clarke’s eyes, however, the idea of being able to buy large items with installment payments versus running up card debt that could affect your credit score is responsible lending, in principle, at least.
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Five Ways to Compete with BNPL Players
For many banks, Clarke sees competing with BNPL players increasingly encroaching on their territory as a matter of when and how, not if. Here are some strategies she outlined:
1. BNPL through post-purchase installment plans based off cards. “This will be table stakes in a few years for every credit card program,” says Clarke. Chase, Citi and American Express, among others, already offer this. (In May 2022 Chase announced that the waiting list was open for Chase Pay in 4, which would be based on its debit cards.)
2. Holiday-time promotions offering interest-free installment plans. Offering BNPL in short windows gives lenders and merchants a targeted opportunity to try out BNPL. In her report Clarke notes that Afterpay offers merchant partners the chance to take part in its own “Afterpay Day” event. In 2021 American Express offered its Plan It service at 0% interest.
3. Virtual cards that enable lenders to offer ‘portable BNPL’ Cardholders can use this feature themselves or provide it to, say, traveling children. The idea is to place limits on the size of resulting installment debt.
4. Going head to head with the basic BNPL programs of companies like Affirm and Klarna. Clarke cautions that banks that decide to emulate the fintechs’ efforts have to master both the consumer and merchant sides of the process.
5. Using a banking as a service approach. Alternatively, banks can provide all the various modules that go into BNPL service to newcomers to build their own BNPL offerings. Examples include WebBank’s partnership with Klarna and Cross River Bank’s relationship with Openpay. Synchrony Bank, a leading issuer of co-branded and store cards, is working with Fiserv to offer white-label BNPL choices for merchants.
Update: Subsequent to this article being published Apple announced its Apple Pay Later foray into BNPL. Read a Deeper Dive about it in “The Potential Banking Impact of Apple’s New ‘Embedded’ BNPL Product.”