BNPL’s Growing Role in Unsecured Lending

Payment for goods on an installment plan is not a new payment scheme, but it has appeared again in response to increased consumer interest. Buy now, pay later gives consumers more control over how much and where they spend it. It also gives them more freedom to buy the things they want, even without enough cash in their account.

In the US, Point of Sale (POS) financing services have grown exponentially, particularly due to COVID-19 restrictions. Use among young people has significantly affected the growth of BNPL, while banking digitization has spurred adoption among merchants.

At this time, players in the fintech market are taking the lead when it comes to BNPL, and so far, only a few banks have responded quickly enough to compete. To avoid significant losses in the future, banks need to understand the current landscape of point-of-sale financing and choose a model that works best for their new customers to credit.

New business opportunities with point of sale lending

Traditional banks and financial institutions need to see the growth of POS financing models as a signal to rethink the lending landscape and their role in it. With most of the value redirected into POS financing from banks – estimated at $8-10 billion to date, it is clearly a very profitable market.

Another important factor is that most of the users engaging in online banking are tech-savvy Millennials and Generation Z. If banks want to see their long-term goals achieved and attract the attention of these younger users, they need to shift their focus to
Bring these changes into the system

  • Integration across the buying journey
  • Rethinking Risk Models
  • Different approaches to credit

Integration across the buying journey

While fintech is busy creating a complete buying journey for customers, banks are falling behind. Integration can broaden and engage younger generations to give banks greater visibility. Using rewards and supporting the costs of credit rewards will increase value for customers and ultimately increase their loyalty.

Rethinking Risk Models

Consumer expectations are increasing daily, especially with trade subsidies. It’s time for banks to rethink and update their risk models to meet those expectations. One possible solution could be business partnerships, where merchants play a key role as intermediaries in this model.

Different approaches to credit

The difference between traditional credit products, installment-based credit cards, and debit cards with new features is increasingly blurring. Banks that begin to offer credit products in the form that their customers want will gain valuable advantages and benefit from doing so.

Everyone, whether they are new banks, card issuers, lenders or commercial acquirers, are vying for market share. By offering BNPL options, they can see how users interact with their platforms and find the right business model to stay afloat in a dynamic market.

It’s clear that buy now and pay later is growing fast. In fact, the results of the 2021 McKinsey Digital Payments Survey suggest that BNPL use may actually grow faster than its penetration.

Buy now, pay later

Since not all POS systems work in the same way, identifying the systems used in the various financial markets shows how much the service has evolved over a short period of time. At the same time, banks can gain a deeper understanding of what they are competing with and ways in which they may outperform.

1. Financing medium-sized purchases with off-card solutions
Solutions such as Uplift and Affirm, which allow payments in monthly installments, are ideal for small and medium purchases. On average, the ticket size is between $250 and $2500 and the time taken to repay the loan is about 8-9 months. Products purchased in this way are typically home appliances, electronics, home fitness equipment, and furniture.

Most of these transactions are done digitally and their growth is fueled by increased adoption among users with higher credit scores. However, consumers are unlikely to use this financing strategy more than several times a year

2. Card installments after purchase
This funding solution is popular in Asia and Latin America, although adoption rates are still fairly low in the United States. Since the post-purchase payment strategy has a higher APR than other point-of-sale solutions, it is less popular. However, the great benefit that it brings after the purchase is the option of merchants to use it with special offers. Installments linked to the card are now available thanks to services like Splitit or network solutions like Visa installments.

3. Shopping App Integration
The ambition of most major shopping apps is to become “super apps”. Major market players like PayPal’s “Pay In 4” offer customer tracking services throughout the entire buying journey. Moreover, they are steadily building volume. Unless the banks find a way to increase their participation, they may not be able to compete at the same level and can expect losses in the near future.

Pay in 4 focuses on small purchases typically under $250, with installments that users can pay off in six weeks. Services like Afterpay have seen massive growth fueled by the pandemic shutdown. As more merchants integrate these products into their payment offerings, the increase of more than 300% in 2020 could be even higher in 2021. McKinsey estimates that Pay at 4 could generate between $4 and $6 billion from revenue by 2023.

The major players in the market are aware of this integration trend. To secure their position in the market, many decided to merge with Klarna and with Afterpay.

Why consumers use BNPL
Ease or convenience. BNPL loans require a deposit or “premium” payment, such as 25% of the purchase amount. The remaining amount is then paid in installments over a period of a few weeks or months.

The interest rate is zero or low. BNPL loans do not include any interest or additional bank fees, but can come with a fixed repayment schedule.

Flexible credit check. To prevent fraudulent behaviour, a facilitated credit check is conducted to confirm the identity of the buyer. There will be no credit check or underwriting process.

Easy approval process. One of the most popular features of BNPL is the quick and easy approval process. It not only affects credit ratings, but it is not related to other creditors.

How banks can benefit from POS financing

Banks interested in participating in POS financing solutions can choose from various financing models. Each presents a unique opportunity because it requires banks to understand the cost and time to market and customer segmentation.

Leasing their balance to BNPL

One example of cooperation between banks and BNPL companies is the model chosen by Cross River Bank and Affirm. Cross River provides Affirm with banking services so it can approve microfinance solutions.

Integration of installments into credit cards

As the BNPL market continues to grow, some banks have decided to integrate premiums into existing credit cards. JP Morgan has developed Citi Flex Pay & Chase Pan to allow its customers to pay their purchases in installments. The strategy of adding new features to existing products or developing new financing products is a good way to meet the needs of customers, especially since most of them have started using alternative financing options to avoid paying exorbitant interest on credit cards.

Take over BNPL
The market value of some of the biggest BNPL players is estimated to be in the billions of dollars. AfterPay and Klarna have both grown so much that even well-known players in the market like Mastercard, Apple Pay and Goldman Sachs decided to introduce new ways to use installments. However, as a standalone model, BNPL does not appear to be viable.

Develop your own BNPL solution
Some banks and financial institutions are willing to meet the needs of their customers and offer in-house developed POS financing solutions. If they want to compete with fintech, their advantage could be a partnership that will allow them to build a unique product equipped with the tailored features that their customers need.

last word
Conventional lenders, conventional banks, and new banks are focusing on finding their place in the point-of-sale financing market. Fierce competition requires them to use their assets to fuel the right business models and to enter the market with competitive products.

What we can ascertain is the basic need that drives customers and how POS financing addresses it. The digitization of large banking systems prevents some commercial banks from developing clear strategies for entering this market. But with the ever expanding market size, POS financing is here to stay.


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