Given the amount of attention devoted to the buy now, pay later (BNPL) market, many bank and credit union executives could reasonably conclude that the market is locked up. Far from it. And despite the hype surrounding this hybrid payment/consumer credit digital product, BNPL is not a trend that anyone in banking can ignore.
A “BNPL bubble” is yet to materialize and its adoption among consumers continues to rise. Its use also has expanded beyond e-commerce and luxury goods where it started. Some consumers now are even using buy now, pay later plans for food, gas and other necessities.
Though BNPL usage has grown rapidly, it only represented 3% of global e-commerce payments methods in 2021, according to a BNPL report published by The Strawhecker Group (TSG) in spring 2022. The percentage is expected to continue to reach 5% by 2025.
Of the consumers surveyed by TSG who had used buy now, pay later services, nearly two-thirds (60%) said they would “Absolutely” continue using BNPL in the future, up from 46% in 2021. (The 60% figure becomes 90% if you include respondents who checked off the slightly less emphatic “I would use it again” option.) A minuscule 3% replied “No” or “Not unless I have to.” (The full 59-page report is subscription-based, but a free 18-page buy now, pay later “mini report” summarizes key findings.)
Vote of Confidence:
Buy now, pay later users who say they would use a BNPL service again.90%
Most banks and credit unions do not as yet have their own BNPL offering, ceding ground to fintechs who often use existing prepaid network rails to launch such products quickly. However, banks have ways to easily enter the BNPL space.
The Power of BNPL Partnerships
Partnering with card networks, tech companies and fintechs is the quickest and easiest way for banks and credit unions to get into the buy now, pay later game. Some have already begun to do so, says Sheridan Trent, senior analyst at The Strawhecker Group.
Only 2% of community banks currently offer BNPL services, according to an American Banker survey. However, 14% say they would be interested in doing so in conjunction with a partner. These opportunities exist and banks can look at them as a viable way to enter the buy now, pay later market.
Better Together:
A tiny minority of banks offer BNPL services, but more than one in five express interest in doing so if it can be via a partnership.
One partnership example would be underwriting buy now, pay later plans for fintechs, says Sheridan. Examples of this include Cross River Bank, which underwrites installment loans made by Affirm, and WebBank, an industrial loan bank owned by Steel Partners, which issues the Klarna Card in the U.S. market — Klarna and Affirm are two of the leading BNPL providers.
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Many banks, however, may not want to serve as the back-end plumbing for a consumer-facing BNPL brand, and partnerships do not just have to be of that variety.
Visa in May 2022 launched a network for banks to find buy now, pay later partners easily, called Visa Ready for BNPL. The goal of the program is to “encourage more banks to venture into the BNPL arena to offer interest-free loans on a per-purchase basis, where fintech-powered players like Affirm, Klarna, Afterpay and PayPal dominate the scene,” as noted by PaymentsSource.
This could be an especially lucrative opportunity for banks and credit unions. The TSG report found that just over 30% of consumers who have never tried using BNPL installment loans said they would be interested in using them if they were available through a bank or other traditional provider. Perhaps surprisingly, Millennials were the most interested in using BNPL installment loans through more traditional providers.
The Rise of BNPL ‘Verticalization’
The cavalcade of buy now, pay later options when checking out at a retail e-commerce site can be staggering.
However, one way for a bank just getting into BNPL to find traction is to target niche markets. This can be a BNPL service for health care, travel and even pet care, says Trent.
“There is a lot of potential for growth in these niche markets,” the analyst states. “BNPL doesn’t just have to be for retail. There are lots of markets outside of traditional retail where we will see growth.”
Find Your Niche:
With the concentration of BNPL services in retail, banks can make inroads by targeting such niche markets as travel, home improvement or healthcare
This so-called “verticalization” of BNPL solutions, “has started in various markets across the globe, with unique providers as well as options geared toward consumers looking for financing in specific industries, especially healthcare (i.e., eyewear, dental, general health), home improvement projects, and travel (i.e., airfare, hotel and hospitality),” The Strawhecker Group report states.
Such offerings will become more popular as inflation leads consumers to become more hesitant over spending large amounts, the report continues.
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Some pioneering smaller banks are already looking to this model. North Dakota’s Cornerstone Bank, with $1 billion in assets, entered into an exclusive agreement with BNPL platform Credova, which serves outdoor recreation, farm, home and ranch segments.
Other banks and credit unions should consider similar opportunities.
“Banks should look at creating a competitive offering or look into a partnership,” urges Sheridan Trent. “BNPL is not going away. Sooner or later, they will have to deal with it on some level.”