The concept of buy now, pay later (BNPL) is not a new emergence. In fact it is over a century old. Paying in installments has been a way for people to manage their liquidity and flexibly pay for goods for a long time. The simple access to such methods, which are embedded directly at the check-out, both online and in brick-and-mortar stores, is something that is currently revolutionizing the payment industry all over again. Online spendings increased significantly during the pandemic due to a heightened pressure on consumer finances, resulting in a recent BNPL boom. According to a study by Juniper Research, spending via BNPL services will reach a whopping $995 billion in 2026, from $266 billion in 2021.
While credit cards dominated the business of delayed payments for a long time, more and more consumers are recognizing the benefits of BNPL. Especially younger generations, such as Gen Z are avid users of buy now, pay later methods, as they value the flexibility and individuality that it offers. According to Credi2, 73% of the 18-34 year olds appreciate the spontaneity that BNPL offers. Also many young consumers don’t yet qualify for a credit card, which has contributed to the overall decline of credit card usage in recent years. According to a study by The Ascent, 62% of buy now, pay later users are convinced it could replace credit cards.
Impeding regulations will benefit banks
For a while fintechs such as Klarna and Affirm dominated the BNPL landscape, but upcoming regulations are threatening to shake-up the business and create a much more level playing field for all parties involved. Numerous BNPL providers have been heavily criticized for their careless ways of carrying out credit checks and doing the bare minimum of educating consumers on the nature of the product and the risk of using it. As a result consumers often end up struggling to pay back their loans in time. Regulatory authorities have therefore recognized the urgent need to introduce directives hoping it will restrain the industry’s foul play and ensure opportunities for new market players while at the same time protecting consumers.
While the impending regulations may be frowned upon by many BNPL providers, their introduction will create a great opportunity for banks. Their biggest advantage: banks know how to comply with regulations. With a regulated BNPL market, they have a chance to step into an established and booming market that matches their skills.
Let’s take a closer look at the further advantages banks enjoy:
- Banks usually have a long lasting relationship with their customers, often even ranging back several generations,
- which naturally results in having the image of a trustworthy brand.
- They have the necessary liquidity, which means that they can keep their refinancing costs at a minimum, unlike many BNPL consumer-facing fintechs which rely on banks.
- Banks are experts when it comes to credit scoring,
- and their clients often include both merchants and end consumers.
- With the right BNPL models, banks will be able to reach Gen Z.
All of these advantages show that banks have an exceptional opportunity in the BNPL business and thus have a right to enter the market and will be successful. Even though banks have just started to introduce BNPL methods, they are very well positioned to scale fast. Banks such as Raiffeisen Bank International and Volkswagen Bank have successfully launched their own BNPL models which leave enough room for further expansion across markets and geographical areas. The biggest German Bank, Deutsche Bank, has announced their own white-label BNPL model which they will launch with creid2.
White-label approach is the way to go
When thinking about entering the BNPL market, banks need to be clear on their approach. Do they build a BNPL solution in-house or should they rely on a technological partner and launch a white label solution? Whichever approach they chose, they are aware that they need to act fast. In fact, the latest Credi2 study shows that 89% of banks know that time is of the essence and that they need to move quickly if they want to take advantage of the growing market. Banks without a doubt have the necessary financial resources to launch their own BNPL solution, however over 40% of bank executives believe that they have a lack of IT resources to do so, and almost as many are convinced that they don’t possess the required end-to-end product expertise as well as the skills to automate the back office processes for a lean setup. But most important to avoid core banking integration to reduce complexity, cost of operation and facilitate going to market speed.
This shows that banks should primarily focus on their key competences and rely on a partner to operate a modular product-as-a-service (PaaS) solution for them and their clients (merchants). White label solutions enable merchants to integrate BNPL products directly into their existing online stores, eliminating the need to outsource parts of the customer journey to a large player seeking to become an online shopping portal. With Credi2 and Deutsche Bank’s BNPL solution, for example, thousands of merchants will be able to launch their own flexible payment method without having to rely on Klarna & Co. Consumers will not be charged high reminder fees since Deutsche Bank conducts a risk assessment and has a high level of liquidity.
What all of this shows is that trusted institutions such as banks, can play a big and important role in the payment ecosystem by educating consumers, offering them flexible BNPL models which meet their individual needs, while helping them to safely and smartly manage their own liquidity.