Buy Now, Pay Later (BNPL) fintechs in the United States raked in a whopping USD 88 billion GMV in 2020, spurring traditional banks to expand their activities to include point-of-sale consumer loans in an attempt to reclaim revenues eaten up by a handful of Silicon Valley unicorns. As a result, the question of how long fintechs will dominate the BNPL industry has become a hot topic amongst investors.
For instance, the staggering figure above is actually less than half of the total assets under management in 2020 by Citizens Financial Group, an institution that recently announced their foray into the BNPL space. Citizens’ high-profile partnerships with Apple and Microsoft will provide point-of-sale financing similar to fintech competitors Affirm and Klarna on Xboxes and iPhones — and that’s only the beginning. Citi and JP Morgan Chase are already commencing with plans of their own.
Added to the sheer volume of cash they lack, the more BNPL fintechs attempt to grow, the more they spread themselves out — so the cost of capital is naturally higher. It obviously follows that the more these fintechs grow, the more money they’re going to have to lend (or raise from investors) and the more expensive it’s going to be for them to do business. Additionally, consumers feel more comfortable with spending money through a BNPL service knowing they’ve been subject to a credit check so as not to be saddled with unaffordable debt.
At the end of the day, banks are always going to be cheaper when providing BNPL services to merchants and customers due to their lower cost of capital and other advantages of scale. Their enormous balance sheets are their bread and butter. So now that banks are catching up on the technology side of things in the BNPL space, the advantage is theirs to gain.
Banks aren’t crashing the BNPL party, they’re fashionably late
Banks will succeed primarily due to their access to capital, experience in risk-based pricing, and also due to the network effect. BNPL fintechs bring on new users through merchants, but banks already have millions of pre-existing customers and merchant clients they provide services for.
To draw an example from the article referenced above, if a Citizens Bank customer is shopping for an iPhone on Apple’s online store and they see the ‘Citizens Pay’ option for financing, there’s the likelihood that they might want to split the purchase up into a BNPL format, and if they do, it’s very probable that Citizens will approve them.
On the merchant side, businesses that tap into the customer base of a large financial institution by utilising the BNPL services they offer, will generate more revenue through a higher customer pre-approval rate. These services offered by banks are also much less expensive than partnering with a BNPL fintech that commands high transaction fees.
Brush away the Snoop Dogg
BNPL fintechs make most of their money through vendor fees. Merchants who utilise BNPL fintechs end up paying between a 3% to 6% transaction fee every time the service is used. With a bank, a similar BNPL service can cost vendors significantly less at 1% to 3% per transaction.
Banks also offer best-in-class service when it comes to the core lending product — approving someone for a loan and servicing the loan. BNPL fintechs have been trying to use AI to create the decision engines banks have had for centuries, but they’re struggling to deliver.
Adding to that, some of these BNPL fintechs have attempted to secure big partnerships with consumer brands in order to attract more customers. This turned out badly for Affirm, which noted to investors in their IPO that Peloton constitutes 28% of their business. Peloton recently had to recall its new treadmill product after reports of multiple injuries and one death, prompting Motley Fool to write: ‘If you own peloton stock, it’s time to sell’.
BNPL fintechs currently have the technology and the sexiness required to attract those users, but when you brush away the Snoop Dogg and the Superbowl commercials, the challenge comes after — being responsible and profitable while granting and disbursing loans to those users.
Big fish eat small fish, ad infinitum
Small fintechs are starting to get absorbed into large financial institutions. The BNPL fintech ‘Bread’ was recently acquired for USD 450 million by Alliance data — a large, co-branded card company that wanted to begin offering POS financing.
Paybright, a Canadian BNPL fintech company, was absorbed by Affirm in 2020 because Affirm was looking to establish its footprint in Canada.
This raises another point: as more BNPL fintechs start attempting to expand internationally, they will need to acquire smaller fintechs that know the financial regulatory rules or be willing to go through the process of coming to understand those regulations themselves.
Traditional banks, on the other hand, are multinational and have had decades to forge international partnerships with other traditional lenders. They don’t face the issue of having to make major adjustments to enter new markets because their presence is already everywhere; they are heavily regulated and accustomed to operating within a regulatory framework.
As banks catch up, it will become apparent that their cost of capital is lower than that of fintechs, resulting in savings for the merchants and higher approval rates. It’s only a matter of time.
About Yaacov Martin
Yaacov Martin is the Co-Founder and CEO at Jifiti. He holds an LLB in Law from the Hebrew University and is an active contributor to leading payments and fintech publications. Prior to Jifiti, Yaacov founded one of Israel’s leading import and distribution companies for consumer goods.
About Jifiti
Jifiti is a leading fintech company on a mission to bridge the gap between lenders, retailers, and consumers. Jifiti enables banks and lenders to provide point-of-sale financing by seamlessly deploying their competitive consumer loan programmes at any merchant's point-of-sale. Merchants and customers can now benefit from the best loan programmes offered by the world’s leading banks based on Jifiti’s cutting edge technology and user experience, both online and in-store. Jifiti works with major financial institutions including Mastercard, Citizens Bank, CaixaBank, Credit Agricole, and retailers including IKEA, Walmart, and others worldwide.
Every day we send out a free e-mail with the most important headlines of the last 24 hours.
Subscribe now