Buy now, pay later (BNPL) has exploded over the last few years and its momentum shows no signs of slowing. In fact, BNPL payments orders grew 85% and revenue increased 88% during Thanksgiving, Black Friday and Cyber Monday compared to the week before, according to Adobe Analytics. Not only is BNPL taking a growing share of lending from many community banks, BNPL platforms are now beginning to move into credit and debit card products too, potentially further eroding banks’ opportunities, and worse, the relationships with their current customers. Fortunately, several white-label solutions are now entering the market, enabling banks to meet the demands for BNPL and to better compete and retain market share of the customer’s wallet.
However, the increased usage and adoption of these solutions has also begun to highlight some of the problems this payment option can pose for both consumers and lenders alike. While it can present an easy way to buy items on credit, every purchase becomes multiple payments to manage and, unsurprisingly, 42% of BNPL users have missed a payment, with 33% of users overdrafting their checking accounts in just one month. As more of today’s borrowers take on an increasing number of BNPL payments, the chance for delinquencies will rise, especially for those customers living paycheck-to-paycheck. Keeping track of BNPL payments in addition to other expenses can get complicated quickly, and for many, one missed loan, credit card or bill payment could mean a long-term hit to their credit scores (and potentially a default for the lending bank).
With BNPL’s popularity and accessibility, it is unlikely to be going away anytime soon, so the question becomes how can banks make BNPL products better and safer for their customers while mitigating their risk? Luckily, banks have several advantages over pure-play fintechs they can leverage to deliver a superior BNPL experience.
- If limiting BNPL offerings to current customers, banks can use customer history to make ability-to-pay judgments prior to extending BNPL credit. Not only will this control potential losses, but it will also enable banks to make stronger offerings, whether providing more credit or as a tie-in with other products (e.g., bumped-up deposit account rates, reduced annual credit card fees, free overdraft protection).
- While banks can only encourage ACH autopay for BNPL payments, alternatively, they can require repayment through payroll-linked payments. This allows customers to simply “set it and forget it,” avoiding the need to manage multiple payment schedules for various purchases. It could also serve as an incentive to set up direct deposit for customers who are not already doing so (or to move their direct deposit).
- Banks can provide tracking tools for their BNPL customers. One key issue with BNPL is that the loans are not typically reported to credit bureaus (although some providers have started). This makes it impossible for lenders to know how many outstanding BNPL loans a customer has (referred to as “stacking” by the CFPB). It is also difficult for customers to track their payments, so banks can add real value by providing visibility, both for themselves as well as for their customers. Additionally, tracking provides greater insights to enhance future ability-to-pay decisions, allowing banks to continue improving their offerings.
- Banks should be fully transparent and go the extra mile for their disclosures. Per the Consumer Financial Protection Bureau, loans with four-or-less payments are not required to provide cost-of-credit disclosures, but doing so can be very useful for the customer. Clearly explaining that while BNPL is interest-free for them, the retailer is paying a fee in exchange for a sale, helps ensure customers better understand the process. Banks can even provide broad guidance on BNPL products for their customers, further enabling them to make good decisions about which payment method is best.
- Banks can create a big cross-selling opportunity by tying a debit card and, potentially, rewards points to a BNPL offering. This could be particularly effective with millennials and Gen Z customers who tend to be higher users of BNPL (and often lack or do not trust credit cards). While debit cards are not big money-makers for banks, they can act as effective relationship-builders that open the door for traditional deposit accounts and other products over time.
Consumer appetite for BNPL products is growing, as are the number of platforms available to meet that demand. In fact, many national banks are either in the process or have already rolled out their own BNPL offerings. While competition is increasing, the good news is that options like white-label solutions offer community banks the tools to become leaders in this popular market and can help level the playing field.
What’s more, as the CFPB introduces new regulations covering BNPL, banks’ competitive advantage versus pure-play BNPL players will likely increase, as most will be much better positioned to adapt and comply with future regulations. Today’s community banks should consider their options now and develop their BNPL strategies to both retain their existing customer relationships and compete for new ones in the future.