In three years, BNPL moved from being a cottage industry hawked by fintechs into a big-business lending product chased by banks, established fintechs, and networks. In the long term, there will likely be a fallout of some weaker BNPL players, but expect bankers to stake their claims even more aggressively than fintechs. That does not mean that fintechs will be asleep at the wheel, but rather that fintechs will need to figure a “what’s next” strategy.
The latest news in BNPL is the alignment of Stripe and Klarna. That’s all good and well, but is it more of a low-budget venture than the recent move by Square to acquire Afterpay? So, now the merchant ecosystem has two top acquirers aligned with two top BNPL lenders. That’s fine, but Ayden, Fiserv, FIS, and TSYS laid their claims months ago.
Concurrently, we have excellent options from Mastercard and Visa in installments, PayPal with an effective “take-over-the-world” strategy (my favorite), and post-paid models by major banks. Yet, if you look at the operating results of many other unincluded BNPL lenders, profits are far from reality.
This trend brings us to the obvious “what’s next” question.
With the winter holiday season days away, credit card portfolios are back in a growth mode. BNPL borrowing will likely add scale, but if you look at the demographics, reduced card portfolios are more of a function of changes in consumer purchasing rather than a walk-away from credit cards. The typical BNPL borrower has a weaker credit score and less credit than a credit cardholder.
What credit card issuers need to figure out is not how to get into BNPL. They have a much more critical opportunity. They need to create a strategy to use BNPL as a feeder group for credit card acquisitions. Take a chance with some risk business, and see how people pay. Use this to offset the thin-file credit issue, which creates a massive market of “credit invisibles.” That’s a real opportunity for credit card issuers to grow and expand.
And, for fintechs, what’s the next step? Booking tons of small ticket, one-off loans is one thing, but the horizon is limited. People cannot stack up against their personal credit needs into 20 BNPL loans and effectively manage their household budgets. So, does your model become one that can source new credit from people on the fringes, or should it look to get into the big leagues with revolving lending?
Time will tell, but be sure of this: Stripe and Klarna may be big news today, but there will be something exciting in BNPL tomorrow. However, the big deal in BNPL is not who is aligning with whom but rather, what is the next act in consumer lending. And that goes far beyond a $100 BNPL pay-in-four loan.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
