The BNPL Opportunity for Regional and Community Banks

The Buy Now Pay Later (BNPL) market is seeing remarkable levels of growth, and this growth is projected to continue for years to come. By 2024 the market is expected to grow 181% and to account for 13% of all global e-commerce payments that same year, according to the 2021 Global Payments Report by Worldpay from FIS. Post-purchase installment programs are nothing new. Unlike credit cards or traditional financing options, BNPL allows consumers to break purchases down into smaller, more manageable payments, without the burden of opening a credit account. Often, BNPL does not even require a “hard” credit check, and if payments are made on schedule there is no interest. This simple, frictionless experience is a major factor driving explosive BNPL growth, particularly because of its appeal to younger consumers.

A New Generation of Consumers

According to a recent article in the Financial Brand, the number of consumers who reported using BNPL payment services jumped 50%. This was due in part to the COVID-19 pandemic. Lockdowns pushed a significant amount of shopping to the online space, where many merchants offered and promoted the service as an alternative payment option at the point of sale. Financial uncertainty likely made it more appealing for many consumers to purchase items without having to pay the full amount up front. Merchants offering BNPL report a significant boost in sales and reduction in so-called “cart abandonment,” or failure to purchase selected items. But perhaps the largest driving force of BNPL growth has been in development for decades – specifically since 1992.

Generation Z (GenZ) and junior millennials, adults born after 1992, are huge proponents of BNPL, so much that they are contributing to an overall decline in credit card ownership. According to FIS research, as of February 2021, 51% of GenZ respondents did not even own a credit card. However, between July 2020 and March 2021, BNPL usage among GenZ respondents jumped 62%. These young consumers are driving real disruption in traditional lending practices. Though GenZ is by far the most enthusiastic demographic, a June 2020 FIS survey of 15,000 consumers around the globe revealed that respondents between the ages of 18 to 39 were particularly receptive to the idea BNPL. BNPL appeals to them as an apparent way to have greater control of their money, managing short-term, no interest payments versus the perceived risk of accumulating unmanageable debt with higher-interest credit cards.

Change is Inevitable

One of the greatest challenges for regional and community banks today is keeping pace with consumer demand. In addition to avoiding interest and the threat of unmanageable debt, many consumers have grown accustomed to seamless, digital customer experiences. BNPL seems to check both boxes. The market is currently dominated by fintechs who have enjoyed a significant advantage from early adoption, cutting edge practices, and operation beyond federal banking regulators. But there are currently few limits on how much debt they can issue, or to whom. Consumers may believe BNPL provides less risk and greater control of spending and debt accumulation, but this is not necessarily true. If a BNPL loan is not paid in full, and on schedule, penalties and fees can quickly pile up. So-called 0% interest plans may only defer a high interest rate, applied to the total initial balance in the event of missed payments. These practices expose not only consumers but merchants and lenders to significant risk. This is certain to change. Regulatory oversight is inevitable, and this will open the door for banks to gain a large share of the BNPL market, and potentially to shape its future.

The Future of BNPL

Projected market growth and a lack of regulatory oversight create opportunities for banks to step in and shape the future of BNPL. As BNPL becomes more mainstream, banks, which are well-established and already subject to regulation, can provide a level stability, security, and trust that current fintech lenders cannot. Big banks possess some clear advantages, but by leveraging open API technology, regional and community banks have the power to compete by seamlessly integrating BNPL offerings into third party ecosystems. With the ability to fund loans with deposits, banks can also offer more competitive fees and rates to merchants. Banks can deliver the same frictionless experience at the point of sale, but with measured protections against inadvisable lending. Harnessing customer data, banks can apply AI and machine learning to the approval process to deliver more balanced, effective decisions. This would be an attractive option for merchants looking to avoid bad debt, and consumers who struggle to avoid it.

Though banks are somewhat late to BNPL, this may ultimately work to their advantage. Bringing consumer trust and regulated lending practices to the table would improve upon what is currently available from BNPL services. Beyond this, banks can pursue other competitive advantages over fintechs, facilitating unique innovations and solidifying their role as a leader in the market.