What’s Keeping Banks Up at Night? Buy Now, Pay Later

The explosion of Buy Now, Pay Later (BNPL) unsecured lending is helping fintechs rapidly realize their dreams while fast becoming a nightmare for banks. In this first of a 2-part series What’s Keeping Banks Up at Night? we examine how banks are uniquely positioned to win in this space – but they can’t sleep on the opportunity.

You may have started skimming the BNPL headlines that dominate financial newsfeeds these days. But it’s hard to skim past this:

$10 billion dollars

According to McKinsey's Consumer Lending Pools data, that is the amount in annual revenues that U.S. banks are losing to the ever-expanding roster of fintechs that are capitalizing on financial institutions’ inadequate response to increased consumer demand for timely and flexible payment options at the point of sale.

Yet, let’s be clear, this staggering loss in revenues is by no means a sign that fintechs are better positioned to win in the BNPL space. Rather, it’s testament to the fact that banks haven’t even come close to entering the game. Only a handful of banks have reacted with competitive BNPL offerings, which suggests either the rest don’t know where to start or, equally distressing, that they are underestimating the threat of losing out on a growing value pool of new and younger customers who globally are predicted to spend USD $995 billion via BNPL by 2026 – four times BNPL’s 2021 projected volume.

It’s critical to note that entering the BNPL market does not require an overhaul of a bank’s existing infrastructure. Today there are technological solutions that seamlessly integrate into a bank’s system of record, transforming historically inefficient, inflexible legacy infrastructure into an agile and secure powerhouse for high-value omnichannel solutions.

And once banks start stepping up to the plate with strategic partnerships that rapidly digitize processes and accelerate speed-to-market with differentiated, customer-centric solutions, they are uniquely equipped to take back leadership in the personal loan space.

For starters, the BNPL offerings of the Klarnas and Affirms of the world are not even 10 years old. Compare that to the hundreds of years of existence of financial institutions. By nature highly regulated and compliant, banks are backed by generations of brand equity embedded in consumer trust.

Plus, there’s a bank’s inherent advantage when it comes to cost of capital. The reason Affirm dominates with Peloton today is because it is simply their only choice. Imagine if another BNPL option were to pop up from a recognizable financial institution when a customer is considering purchasing that pricey exercise equipment. Aside from the inherent confidence of an established brand, the lower interest rate alone would be enough to attract that buyer.

There’s also a misconception that the younger generations prefer the neo challengers when, in fact, market data reveals that Gen Z and Millennials still prefer to bank with the trusted institutions of their Boomer parents… they just wish the old guard offered convenient, friction-free payment options that allowed them to shop when, where and how they want. And these are the customers you want to acquire now, while they are early in their careers and seeking a trusted partner in their financial journeys. Furthermore, the cost to acquire this type of new customer costs zero – or even less – when you consider the myriad of cross-sell opportunities for other loans, credit cards, deposit accounts, etc. over the customer life cycle.

Simply put, without a BNPL offering, banks may be missing the biggest acquisition opportunity to date. And that’s nothing to sleep on.