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BNPL Architects: How Apple, Amazon & Co are building the embedded finance revolution

20.06.2022
5 min
Christian C. Waldheim

Apple, Amazon, and PayPal are finally bringing “Buy Now Pay Later” into the mainstream. Banks should not fear because the coming regulation will give them an important advantage over the fintech challengers.

It is an honor for the fintech trend: Apple, the most valuable tech company in the world, will enter the fast-growing “Buy Now Pay Later” (BNPL) market this fall. The integration of the Apple Pay service into numerous apps and online shops enables customers of the iPhone giant to spread the cost of an Apple Pay purchase in four equal installments over six weeks. Instead of relying on its previous partner Goldman Sachs, with whom Apple launched its own credit card, Apple is now going its own way. The new subsidiary, Apple Financing LLC, will offer lending services itself. This service is turning the US tech giant into a bank, so to say.

Apple is joining the architects of the BNPL industry alongside pioneers such as Affirm of former PayPal co-founder Max Levchin and Klarna from Sweden, both of which are established innovators in the digital market since 2012 and 2005 respectively. It is no surprise that Apple wants a piece of the pie. Other major international BNPL players are the Australian BNPL giants Zip and AfterPay (now a subsidiary of Block), Unzer (Germany), Ratepay (Germany), Credi2 (Austria), and Scalapay (Italy). After all, it was the US pioneer Affirm who helped the e-commerce giant Amazon enter the BNPL market in the B2C sector in 2021. And Amazon is expanding further: together with the renowned financial institution Barclays from UK, the online giant has now also introduced the option of installment payments for European customers based on Amazon Pay. Amazon is showing how partnerships between tech players and banks can bear fruit.

Growth: 5x in the next 5 years

 

Although these and other current BNPL providers have approached the core of the business model from different directions (Klarna started with purchase on account), one thing unites them today: they enable consumers all over the world to have access to digital financing solutions, such as installment purchase, quickly and easily directly in the shopping process. BNPL is indispensable for e-commerce providers today, and the demand is enormous. BNPL solutions have become the biggest challenger to credit cards when shopping (i.e. digitally as well as at the PoS). According to market researcher Juniper, the BNPL market is expected to grow from $266 billion in 2021 to $995 billion in 2026. That equates to 5x growth in just five years. 

Some banks, but by no means all, have recognized how relevant the most important fintech trend of recent years is for them. And many acknowledge that BNPL shouldn’t be ignored. Some of the variety of payment options BNPL offers include purchase on account, which is the simplest, installment purchases, consumer and installment loans, and credit lines. In other words, all financial products that used to be looked for at banks, can now be embedded directly into the digital purchasing process using embedded finance. Apple or Klarna have caught on – they will become a sought-after helper for consumers directly at the touchpoint (e.g. the web shop) and can win new customers via BNPL. This is also well received by retailers as they benefit from higher conversion rates and larger shopping baskets.

A window of opportunity for banks

 

Traditional banks are now seeing fintechs encroaching ever further into their core business. While some BNPL providers like Klarna are becoming a bank themselves and are currently struggling with the changed market conditions (high inflation, Ukraine war, recession, etc.), B2B players like Credi2 are going to sell their white label solutions with strong, established banks and thus be able to offer merchants stable digital financing solutions. On the other hand, there are all-in-one providers (e.g. Ratepay, Scalapay), who  offer everything from the brand and shopping app to the financing, and are therefore much more exposed to market turbulence.

While Affirm, Klarna, or Afterpay (now a subsidiary of the payment specialist Bock) are having an increasingly difficult time as B2C companies, the BNPL market in the B2B area is flourishing. Current examples of this are Mondu from Berlin, which specializes in payment methods for business customers, Walnut with BNPL solutions in the healthcare sector, and Tranch, which specializes in BNPL in the SaaS area. The B2B2C company Credi2 also plays a role in this strongly growing category as a white label provider and partners with established banks such as Volkswagenbank, and Raiffeisenbank International (RBI).

The downside of the BNPL boom: Some providers are notorious as a digital debt trap for Generation Y. The social media hashtag #KlarnaSchulden (in English: #KlarnaDebts) generated millions of views thanks to people who can not pay their debts on Klarna. Europe’s market leader has already reacted by doubling the payment period for invoices and reducing reminder fees. Klarna’s business model has long been criticized by consumer advocates because the Swedish fintech made a lot of money with reminder fees. This is one of the reasons why the demand from politicians to make digital money lenders more responsible is getting louder and louder. From Australia through Great Britain, the EU, to the USA – BNPL solutions are pending stricter requirements from financial regulators around the world.

Regulation as an opportunity

 

And that’s where banks see their chance.

 

“Banks have recognized BNPL as strategically important because it opens up the opportunity to reach Generation Y through new channels. They shouldn’t let fintechs lead the industry, now is their time to grab the opportunity and enter the market,” says Christian Waldheim, Co-CEO of Credi2.

 

“The EU Commission is striving to harmonize consumer protection and digital consumer lending, and this gives banks a decisive advantage over young tech players: They already meet the strict regulations and can quickly enter the booming market with us as their tech partner, while many fintechs will struggle to meet the stringent requirements.”

Banks looking for a white label tech specialist in the BNPL area will start paying more attention to who meets particular compliance standards with which product portfolio. Compared to others, Credi2 offers a comparatively broad portfolio and has already taken a step into subscription economy with its popular subscription model for Apple products. Even though BNPL newcomer Apple doesn’t rely on a bank partner, when it comes to subsriptions the tech giant and its many retailers (such as McShark or Cyberport) have chosen a strong partner: Credi2 from Vienna.