Banks Could Be The Future of Buy Now, Pay Later
Between summer 2019 and summer 2020, the number of consumers who reported using Buy Now, Pay Later services increased by 50%, and the trend continues to grow.
Retailers choose to embrace these solutions once they realize that consumers are more likely to pull the trigger on large purchases if they can be restructured with little friction into smaller payments to remove the burden. to spend a large amount of money.
Young consumers, especially Gen Z and Millennials, have turned to BNPL. They find monthly payments on a high-interest credit card unappealing and see BNPL as a preferable alternative that gives them more control.
Retailers looking to add the allure of convenience to their shopping experience may want to consider partnering with a BNPL service like Klarna, Afterpay, or Four. However, these services have drawbacks that must be taken into account.
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The reasons that make these new fintech services attractive to consumers could be the same reasons traditional consumer lenders – especially banks – are likely to be successful in the BNPL industry in the long run.
Are the days of BNPL Fintech numbered?
Most of BNPL’s services are primarily tech companies that don’t have to face the scrutiny of federal banking regulators for how much debt they issue and to whom. Over time, it is inevitable that unregulated institutions issuing debt will be exposed to more risk than their regulated counterparts by the very nature of this lack of regulation.
In Europe and Australia, for example, consumer groups are starting to push back BNPL fintech, arguing that these unregulated lenders are able to sell up to $ 30,000 in installment debt to consumers based on approval processes. based on algorithms. This can leave consumers suddenly finding themselves in an avalanche of debt that they may not have realized they were racking up – and that they are unable to pay.
Banks have belatedly adopted the technology behind BNPL’s payment programs, but once they adapt the necessary software to compete, they will begin to take market share from BNPL’s fintechs.
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How to ensure the security of BNPL programs for consumer and lender
The main attraction that BNPL’s services offer consumers is their promise of transparency and security. Consumers want to know that the smartphone or sofa they buy costs ‘X’, which means they have to pay ‘Y’ installments, and if they don’t pay within 90 days, ‘Z’ is it. that they will have to.
This simplified contractual method of splitting large purchases means consumers don’t have to factor in an interest rate on multiple credit card purchases over time, by comparison.
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The difference between banks and startups in the BNPL industry is how they can put measured pressure on the ‘frictionless’ approval process in order to prevent buyers from making a bad decision that ultimately leads them to fail. debt too much.
Since banks are regulated, both the lender and the consumer would benefit from an additional degree of security when they divide their purchases into repayment agreements.
While waiting for the opportunity to flourish BNPL
There are arguments against BNPL. Traditional lenders might not want to offer loans on purchases of $ 50 to $ 500 and would be inclined to leave these small transactions to fintechs. And they would probably avoid lending to consumers whose credit scores are too risky. Retailers may find the fees associated with BNPL services too high to be considered justifiable. And stores that issue their own credit cards might think BNPL options would cannibalize these programs.
In addition, by making shopping easy and attractive, customers have ended up with obligations on several small individual loans totaling amounts that are not necessarily easy to repay. This prompted some banks to ban the use of credit cards to pay for BNPL transactions.
The reputation with consumers that some BNPL programs are building could catch up with fintechs in time. This could allow traditional banks to step in, potentially offering better BNPL programs to consumers.
Banks can afford to play for the long haul. Retailers will switch to more secure lenders once they know better options are available. And some small retailers who might fear ending up with bad BNPL debt if fintech lenders have problems may be more willing to partner with financial institutions.
The fintechs are currently winning the battle, but the banks will win the BNPL war. One reason is that as fintech innovators become mainstream, they are likely to come under regulatory scrutiny. Traditional lenders, able to use deposits to fund loans, will be able to compete by offering better interest rates to merchants and consumers.
Additionally, traditional bank lending processes are expected to prevent more consumers from having bad debt, which will provide safer transactions for lenders, customers and merchants. Competition and innovation are the lifeblood of the financial services industry, and as new technological trends gain in adaptability, cutting-edge solutions will always emerge to replace the old ways of doing things.