The growing role of BNPL in unsecured loans
Paying for goods in installments is not a new payment scheme, but has re-emerged in response to increased consumer interest. “Buy now, pay later” gives consumers more control over how much and where they spend. It also gives them more freedom to buy the things they want, even without having enough cash in their account.
In the United States, point-of-sale (POS) financing services have increased significantly, especially due to COVID-19 restrictions. The use by the younger population has largely contributed to the growth of BNPL, while the digitization of banking has stimulated adoption among traders.
At the moment, the leader when it comes to BNPL are players in the fintech market, and so far only a handful of banks have reacted quickly enough to compete. To avoid major losses in the future, banks need to understand the current POS financing landscape and choose the model that works best for new clients.
New business opportunities with point-of-sale loans
Traditional banks and financial institutions must see the development of POS financing models as a signal to rethink the credit landscape and its role in it. As fintech diverts most of its POS funding from banks – estimated to date at $ 8-10 billion, it is clear that this is a very profitable market.
Another important factor is that the majority of online banking users are young tech savvy millennials and Gen Z. If banks want their long-term goals to be met and grab the attention of younger users, they need to focus on:
introducing these changes to the system
- Integration along the entire purchasing path
- Re-think risk models
- Different loan approaches
Integration along the entire purchasing path
While fintech is busy creating a complete customer purchase path, banks are lagging behind. Integration can help to scale up and engage younger generations to give banks greater visibility. Using rewards and subsidizing the cost of the credit reward will bring more value to customers and ultimately increase their loyalty.
Re-think risk models
Consumer expectations are growing every day, especially thanks to trade subsidies. It is time for banks to rethink and update their risk models to meet these expectations. Trade partnerships could be one possible solution as traders play a key role as intermediaries in this model.
Different loan approaches
The difference between traditional credit products, installment credit cards and debit cards with new features is becoming more and more blurred. Banks that start offering credit products in the format their customers want will benefit and take advantage of.
Everyone, be it neo-banks, card issuers, lenders or sellers, is competing for market share. By offering BNPL options, they can see how users interact with their platforms and find the right business model to stay in a dynamic market.
It is obvious that the Buy Now, Pay Later feature is growing rapidly. Indeed, the results of McKinsey’s Digital Payments Survey 2021 suggest that the use of BNPL may actually grow faster than its penetration.
Clear models Buy now, pay later
Since not every POS system works the same, describing the systems used in different financial markets shows how much the service has evolved over a short period of time. At the same time, banks can better understand what they are competing with and how they can achieve it.
1. Financing mid-size purchases with off-card solutions
Solutions such as Uplift and Affirm, which allow you to pay off in monthly installments, are ideal for small to medium-sized purchases. The average ticket size ranges from $ 250 to $ 2,500 and the loan repayment time is around 8-9 months. Products purchased in this way are usually household appliances, electronics, home fitness equipment and furniture.
Most of these transactions take place digitally, and their growth has been fueled by increased adoption among users with higher credit ratings. However, it is unlikely that consumers will use this funding strategy more than a few times a year
2. Card installments after purchase
This financing solution is popular in Asia and Latin America, although adoption rates are still quite low in the US. Since the post-purchase payoff strategy has a higher APRC than other POS purchasing solutions, it is less popular. However, the big advantage it brings after the purchase is the ability for sellers to take advantage of special offers. Pre-paid installments are now available with services like Splitit or network solutions like Visa Raty.
3. Integration of shopping applications
The aspiration of most large shopping apps is to become “super apps”. Major market players such as PayPal “Pay In 4” offer services that track customers throughout the purchase process. Moreover, they are constantly building up the scale. If banks do not find a way to increase their exposure, they may not be competitive at the same level and expect losses in the near future.
Pay in 4 focuses on smaller purchases that typically don’t exceed $ 250, with installments that users can pay off within six weeks. Services like Afterpay saw tremendous growth fueled by the pandemic blockade. With more sellers integrating these products into their checkout offerings, growth of over 300% in 2020 could turn out to be even higher in 2021. McKinsey estimates Pay in 4 could generate $ 4 billion to $ 6 billion in revenue by 2023.
The big market players are recognizing this integration trend. To secure their position in the marketplace, many have chosen to integrate Etsy.com into Klarna and Houzz.com into Afterpay.
Why Consumers Use BNPL
Convenience. BNPL loans require a deposit or “installment”, eg 25% of the purchase amount. The remaining amount is then repaid in installments over several weeks or months.
Zero or low interest rate. BNPL loans do not include any additional interest or bank charges, but may have a fixed repayment schedule.
Easy approval process. One of the most popular features of BNPL is the quick and easy approval process. Not only does this have no effect on your credit ratings, it has no effect on other creditors.
How banks can take advantage of POS financing
Banks interested in engaging in POS financing solutions may choose from a variety of financing models. Each of these offers a unique opportunity as they require banks to understand costs, time to market, and customer segmentation.
Rent your balance to BNPL
One of the examples of cooperation between banks and BNPL companies is the model chosen by Cross River Bank and Affirm. Cross River provides Affirm banking services so that they can approve microfinance solutions.
Integrate installments with credit cards
Along with the development of the BNPL market, some banks decided to include installments in their existing credit cards. JP Morgan developed Citi Flex Pay & Chase Pan to enable its customers to pay off their purchases in installments. A strategy of adding new features to existing products or developing new financial products is a good way to meet customer needs, especially as most of them have started using alternative financing options to avoid paying exorbitant credit card interest.
Takeover of the BNPL company
The market value of some of the largest BNPL players is estimated at billions of dollars. AfterPay and Klarna have grown so much that even famous players in the market such as Mastercard, Apple Pay and Goldman Sachs have decided to offer new ways to use Rat. However, as a standalone model, BNPL does not seem to be profitable.
Develop your own BNPL solution
Some banks and financial institutions are ready to meet the needs of their clients and offer POS financing solutions developed in-house. If they want to compete with fintechs, their advantage may be a partnership that will allow them to build a unique product with the tailor-made features that their customers need.
Traditional lenders, traditional banks and neo-banks focus on finding their place in the POS financing market. Fierce competition will require them to use their assets to fuel the right business models and enter the market with competing products.
What we can be sure of are the basic needs that drive customers and the way POS financing meets them. The digitization of large banking systems prevents some commercial banks from developing clear entry strategies. But with the ever-growing scale of the market, POS financing will remain.