Imagine the Buy Now Pay Later (BNPL) industry as a car accelerating as the market grows. But the problem with moving quickly is that it becomes difficult to see street signs, avoid danger, and brake when needed. That is what regulation does—it keeps the car within the speed limit and the road lines. Ultimately, it ensures less danger to passengers, other cars, pedestrians, and even the driver themselves.
Considering that Americans owed more than $15 trillion in the third quarter of 2021 and debt is untrackable through BNPL, the Consumer Financial Protection Bureau (CFPB) felt the need to take action and request information from five BNPL providers: Affirm, Afterpay, Klarna, Paypal, and Zip. The goal of the CFPB is not to stop the BNPL car from getting to the final destination, but to provide a safer journey for millions of passengers and to the economy as a whole by encouraging fair and responsible lending.
Only time will tell how the new regulations will affect these BNPL providers. But one thing is certain—it is prime time for banks to strengthen their position in the market.
Banks have a clear, point-blank advantage
Fintechs diverted $8-10 billion in annual revenue away from banks in 2021. This was due to the fact that fintechs were the first to market with BNPL solutions and were therefore the only option that consumers had to enjoy convenient, seamless, and fast financing at the point of sale. But some 70% of current BNPL users say they would be interested in using BNPL plans from their banks if such offerings were available. Therefore, banks have reasons to enter the market—and the CFPB’s move has set up the perfect conditions for them.
Regulatory compliance, transparency, and reporting to credit bureaus might be new to some BNPL startups. However, unlike unregulated fintechs, banks are no stranger to any of these practices. So, while the new regulations may cause challenges for some BNPL companies, banks will be able to strengthen their position.
We’ve already seen large banks such as JP Morgan Chase with its My Chase Plan and Citizens Bank with Citizens Pay step into the BNPL space. And for other banks considering offering BNPL as a service, there’s more good news—53% of consumers say trust is indispensable when choosing a lender for a short-term credit product. Banks are in a prime position with their valuable, trusted brand names, expertise, and reputation, especially if they consider partnering with fintechs on the technology front.
Banks that partner with fintech companies can deliver the same seamless experience at the point of sale (POS) as direct-to-consumer BNPL providers, but with the added protection against irresponsible lending and sometimes more competitive rates for the merchants. With the right fintech partner paving the road, banks can reap the rewards of offering a range of consumer credit products and can forge long-lasting relationships with customers.
With banks having a stronger presence in the BNPL space, what will change for merchants and consumers?
With the ability to bring fair and responsible lending options to the table, banks possess the power to improve BNPL services, leading to healthier and better financial outcomes for merchants and customers.
Merchants already attract more customers by simply offering BNPL payment options.The heart of the issue is that a direct-to-consumer fintech transaction may cost 3-6% of the purchase value, compared to bank BNPL transaction fees, which can be as low as 2-3%.
Banks can offer more competitive fees and rates to merchants by leveraging their strong balance sheets from deposits. Once more and more large banks start moving into the BNPL space with lower transaction fees, merchants that offer BNPL to consumers will be able to reduce related overhead expenses. Additionally, and maybe more importantly, merchants that offer fair and responsible lending options will build trust with customers and boost their brand reputation.
Unregulated BNPL services pose a threat to financial well-being. To illustrate this, a Credit Karma study showed that 72% of BNPL consumers in the US ended up with lower credit scores, which could hinder consumers’ ability to access credit in the future.
With their tried-and-tested credit-decisioning models that identify, control, and monitor past and present lending activity, banks can help consumers borrow responsibly without overextending themselves and avoid getting into debt they can’t repay. With regulators cracking down, banks that offer BNPL financing will prevail, as this seems to be the safest and wisest option for consumers.
