Weathering the BNPL Storm
By Nikhil Manchanda, Consultant – Solution Consulting at SunTec Business Solutions
The emerging Buy Now Pay Later, commonly known as BNPL is the latest disruption in the once staid banking and financial services sector. Though BNPL has existed for some time now, it has garnered a lot of interest lately. The easy availability of payments via installments at the point of sale is attracting millennials and Gen Z customers who were earlier deterred by the high cost of goods and high rate of interest when purchasing goods on credit cards. Though this service is still niche, it is growing at a fast pace, fuelled in part by the unique restraints and conditions of the COVID-19 pandemic. In fact, reports suggest that BNPL spending at e-commerce point of sale is likely to go up to about USD 680 billion by 2025.1
With BNPL, banks need to address two key questions:
- Is credit card usage declining and will it eventually make the credit card obsolete?
- What can banks do to win in this emerging space?
BNPL services can present a significant threat to the credit card industry and the banking sector. Not only do credit card companies stand to lose out on revenues through interests, and late fees, but they could also see their consumer loan business sustaining losses. More importantly, it can lead to eroding customer loyalty. Right now, the BNPL space is dominated by fintechs and tech giants like Apple are also making their way into the fray. While they have the flexible business models required for BNPL, they still don’t enjoy the significant trust that banks and credit card companies enjoy. It is now time for the latter to seize the opportunity to revamp their strategies for the BNPL era.
Joining the BNPL Race
The lack of interest on BNPL transactions is one of its biggest attractions for the younger customers. Incumbent banks are now beginning to explore, interest free or low interest, long term instalment payment options. For example, National Australia Bank (NAB) launched “Straight Up”, a card that allows customers to borrow up to A$3000 against a nominal monthly fee.2 The Commonwealth Bank of Australia is expected to follow suit with a 0% interest card of their own. Citigroup launched Citi Flex Pay and Chase Bank introduced My Chase Plan.3 Both these services allow customers to pay for large purchases in instalments for a nominal fee. They are still linked to a credit card but considering the customer trust they enjoy these cards are likely to see an uptick in adoption. Mastercard and Visa, two of the world’s biggest credit card companies are also working on instalment payment options for their customers.
Banking on an Ecosystem
The other interesting possibility for traditional banks and credit card companies in the BNPL space lies in the emerging banking ecosystems trend. Banks are increasingly working towards becoming ecosystem orchestrators with a plethora of banking and non-banking partners who will deliver value added services to customers. This move is indicative of a fundamental shift in banking to a completely customer centric model. According to a study by Citizens Bank in the US, 76 percent of buyers would be interested in making a retail purchase if they could avail of a simple instalment based payment plan at the point of sale.4 This is a significant revenue opportunity for retailers and sellers. By leveraging existing merchant relationships or forging new ones, banks can drive sales and mutual profits by offering customized interest free instalment payment options. BNPL players have already started partnering with key merchants – Affirm has partnered with Shopify, Gucci, Bonobos, The RealReal and Peloton.5 And Klarna secured an investment from its partner Macy’s ahead of the holidays last year. It is time for banks and credit card companies to follow suit.
Forging symbiotic relationships with BNPL fintechs is also a good strategy. Traditional banks and credit card majors have a depth of customer data and a reach that is invaluable for fintechs looking to make their mark while fintechs have the technology expertise and flexibility required for launching innovative services like BNPL. Barclays has already partnered with Amount for Point-of-Sale BNPL solutions in a bid to connect better with younger customers. The sector is likely to witness many such partnerships, acquisitions, and investments in the years to come.
Shopping on credit is not a new phenomenon and the credit card industry goes back several decades. But BNPL’s attractiveness lies in its ease of use. It comes at a time when customers are demanding easier engagement models, fuss free transactions, and flexible payment options. Banks and credit card companies must use this opportunity to relook at their operating models and come up with innovative new offerings to thrive in this new customer driven economy.