Reinventing consumer finance: Buy Now, Pay Later encourages banks to transform

Key factors driving BNPL’s growth

The rise of BNPL can be attributed to the numerous benefits it offers to its key stakeholders:

• Customers: BNPL offers a fully digital solution with easy access and transparency in finance charges, making it an attractive alternative to revolving credit cards or personal loans. As a credit solution, it also enhances purchasing power, offers a buffer against inflation, and improves financial liquidity.
• Merchants: BNPL drives higher average order values (AOV) and more frequent purchases. It also boosts customer satisfaction and loyalty while minimizing financial risk.
• Financial institutions: Lenders can capitalize on additional lending opportunities through micro-lending, increasing their revenue streams. They can also now tap into additional revenue sources coming from fees applied to Merchants, which have become prime beneficiaries of these solutions. This marks a shift from conventional credit models that rely on income derived solely from final consumers.

In addition to addressing market demands, there are significant advancements poised to solidify the industry's position:

• Open banking and FiDA: The advent of open banking and the Financial Data Access (FiDA) framework will bolster BNPL services, through their facilitation of improved understanding of clients’ financial profiles, supporting credit risk assessment and customizing instalment plans around this.
• AI and KYC: Advancements in AI are now being applied to credit scoring and Know Your Customer (KYC) processes to enhance lending institutions' ability to mitigate default risks, fostering a sustainable future for BNPL too.

BNPL’s untapped potential

The Buy Now, Pay Later sector in Europe is mainly driven by fintech firms, with Klarna leading the way. PayPal also delivers a seamless solution, which has been widely embraced thanks to its extensive merchant network.

There are currently several BNPL solutions offered in the market, with the most prevalent being offered as payment options at online checkout stages. Some firms are also innovating by issuing pure BNPL credit cards directly to consumers, usable anywhere Visa or Mastercard is accepted. However, many countries have yet to tap into the full potential of this model, as its adoption remains limited.

BNPL-as-a-Service is also gaining traction, especially among payment service providers (PSPs) and financial institutions. These entities are seamlessly embedding Buy Now, Pay Later offerings into their service portfolios, helping them to easily expand their offerings. In the European market, however, only a handful of players are spearheading the adoption of these customizable enterprise solution.

Each of these BNPL model presents distinct advantages and challenges. While Buy Now, Pay Later at checkout primarily suits e-commerce, deriving revenue from retailers and consumers, it is limited to affiliated merchants. BNPL credit cards, on the other hand, provide flexible instalment purchases at any store, both online and physical. However, it is important to note that they rely exclusively on consumer-based fee revenue, which could cause higher interest rates for customers while allowing merchants to benefit without incurring in any interest charges.

Buy Now, Pay Later as a service, on the other hand, emerges as an attractive option for retailers, marketplaces, and PSPs, potentiated by their ability to amplify brand presence and enrich the user experience, while allowing customized business frameworks.

After exploring the various BNPL solutions, a crucial question arises: How effectively is Buy Now, Pay Later being used in physical stores? Despite assertions from several BNPL providers about offering seamless services similar to e-commerce, the reality is that its use remains minimal.

This raises an important question: Why not make more of an effort to enhance solutions for this largely untapped sector? If BNPL-only credit cards were accepted at any merchant, it could revolutionize the in-store purchase experience by offering a quick and convenient option for consumers seeking instalment payment flexibility beyond affiliated stores.

With the right credit controls and lending limits, this business model has the potential for widespread adoption. But this raises another critical question: Why are only a few players leveraging on this model, especially when considering the limited competition in European markets?

The urgent call for banks to embrace BNPL and APM

Buy Now, Pay Later (BNPL) and other alternative payment methods (APM) present banks with substantial opportunities for growth, that could lead to a significant boost in payment revenue streams. If banks effectively harness BNPL and other APMs with innovative strategies, they could potentially increase their payment revenues. However, failing to act strategically in this area could result in considerable losses in incomes, as traditional payment methods might suffer from potential product cannibalization.

This is in part because as Buy Now, Pay Later becomes more available, it is likely that consumer spending will shift away from traditional credit cards. Although this change might not entirely impact interchange revenue for institutions that issue credit cards—because some BNPL repayments still use credit cards—the revolving balances are likely to be affected as revenue from interest is reduced.

These findings underline the importance that banks must place on taking proactive steps to not only safeguard their market share in the payments sector, but to sustain, if not increase, their revolving balance revenues in the years ahead. 

How banks are already well positioned to integrate BNPL

Leading banks in Europe are already pioneering innovations through acquisitions, partnerships, in-house developments, or new ventures. From direct integration into their mobile apps and Buy Now, Pay Later credit cards to embedded options in the checkout process of merchants, consumers are seeing banks implement new solutions. However, despite this progress, the expansion is still uneven, with major retail and neo banks leading the charge while mid-sized lag behind.

As the BNPL market matures in the EU, banks will need to act effectively to stay competitive and avoid potential revenue loss. In a market largely controlled by fintech companies—ranging from numerous small players to a handful of giants—these firms are primed to seize the BNPL-powered growth if banks delay to act.

The shift in payments presents significant opportunities for banks, as it fills the gaps unmet needs in the market. By leveraging their existing advantages, banks can seize this momentum to quickly carve out a space in this BNPL market, mitigating the anticipated risks.

But what unique advantages do banks have that would allow them to rapidly enter and gain share in the Buy Now, Pay Later (BNPL) market?

• High levels of trust: Banks have the distinct advantage of enjoying high levels of trust among both customers and merchants. This decades-long confidence is built not just on brand recognition, but also on their financial strength and adherence to rigorous financial industry regulations, ensuring maximum consumer protection. In addition, banks have built a solid reputation for detecting and preventing financial scams and cyber fraud, making them a safe option for payment solutions. With these points in mind, consumers can then trust that their BNPL transactions are as safe and secure as any other banking transactions.
• Extensive customer data: Another significant strength of banks is their access to extensive customer data. This wealth of information allows them to conduct thorough risk assessments for BNPL eligibility, mitigating the risks associated with lending and ensuring a sustainable BNPL model. This data can also be used to forecast client purchasing behavior, enabling the creation of personalized instalment plans that tailor factors like repayment schedules and interest rates, moving away from rigid models.
• Established expertise: Bank’s deep-seated expertise in the finance sector, along with extensive knowledge in managing loans and financial transactions, positions them perfectly to integrate BNPL services into their existing operations. Banks can also leverage their current IT infrastructure and operational teams to facilitate an expedited BNPL go-to-market strategy, potentially accompanied by synergies and cost savings.
• Funds: Last, but certainly not least important, banks have the funds needed to ensure a robust deployment of BNPL solutions in the short term. This is a critical advantage when one considers the liquidity challenges the Fintech sector has faced due to interest rate variations and other unforeseen setbacks.

Europe’s regulatory landscape is shifting to adapt

Previously, Buy Now, Pay Later services fell into a grey zone in terms of how they were regulated. However, they now fall under the revised Consumer Credit Directive (CCD) adopted in October 2023. The CDD aims to ensure transparent information for consumers, protect them against any type of abuse, and prevent over-indebtedness. As BNPL financing will now be considered as consumer credit, those BNPL providers operating in the EU will need to obtain licensing as credit providers and conform to responsible lending mandates.

Consequently, BNPL providers must brace themselves for the enactment of these regulations, expected to take effect by the end of 2026. Its implementation will require compliance within advertising, pre-contractual disclosure, creditworthiness checks, formal obligations, and withdrawal rights.

Leading the way for future consolidation

The rapid and widespread adoption of Buy Now, Pay Later (BNPL) solutions can be attributed to their significant advantages within the retail industry. Consumers have benefited significantly from these options, as they provide a buffer against diminished purchasing power caused by rising prices in recent years. As such, growth projections for the BNPL market in Europe remain optimistic, driving investment and attracting new entrants.

Given these factors, BNPL is poised to firmly establish itself as a globally recognized sector, capable of navigating intense competition, economic cycles, and tightening regulations.

As we conclude our examination of the BNPL landscape, several questions remain open:

• What is the optimal strategic positioning for banks entering this market, considering current unmet needs?
• Can traditional banks entering the BNPL market challenge and seize market share from the fintech giants?
• How will the evolving regulatory framework impact existing players and shape the future of the industry? 

These questions not only hint the complexities of the BNPL sector but also underscore its dynamic nature, ensuring that its trajectory will continue to captivate industry players and consumers alike in the foreseeable future.