What future BNPL industry trends are waiting for you

ByDavid M. Conte

May 24, 2022

The following is a guest post by Yaacov Martin, CEO and co-founder of jifiti.

BNPL fintechs undergo economic growth and legal pressure due to increasing competition, regulatory investigations and concerns about consumer indebtedness and lending practices.

Consequently, BNPL market consolidation skyrocketed in 2021: Block (formerly Square) acquired AfterPay and Australian-based BNPL fintech Zip. agreed to buy rival Sezzle.

Due to BNPL’s falling fintech losses and their shares are falling, there is a tremendous opportunity for consumer finance traffic to return to banks. They can offer unique BNPL solutions that are as regulated as credit products.

By 2026, BNPL payments are expected to account for almost a quarter of all global e-commerce transactions, according to Juniper Researchwith banks ready to lead the way.

So what changes can we expect in the BNPL industry this year and beyond?

Banks are taking a proactive, not defensive approach

Are banks entering BNPL as a defensive measure against fintechs?

Banks were slow to react at first, but quickly sought to enter the market after seeing the long term value in point-of-sale (POS) financing, both as a merchant and customer acquisition tool and as added value for existing customers.

Some global banks are adopting BNPL offerings to protect their turf from fintech companies using BNPL as a stepping stone to becoming digital banks. But defensive moves usually put companies behind the curve.

Banks that proactively view BNPL as a way to engage with customers who otherwise would not apply for consumer finance will find themselves ahead of the game.

Split payment, where consumers split their purchase amount into three or four repayments, is a BNPL product that appeals to consumers who would not typically apply for consumer loans. It is not a loan but rather a payment product that uses an existing credit card.

Companies playing to their strengths

So far, there has been a blurring of lines in the fintech space, especially when it comes to BNPL.

Tech companies have tried to replace on-balance sheet lenders and step out of their core competencies.

But when companies focus on their core capabilities, that’s when the best results are cultivated.

Banks that partner with a third-party provider or fintech infrastructure solution for cutting-edge technology are well on their way to building a sustainable BNPL model. Indeed, each entity involved sticks to its core competencies.

Banks can continue to do what they do best – balance sheet lending – and tech companies can invest in developing their cutting-edge technology.

Merchants concerned with customer loyalty

Merchants know that letting a third party participate in their customer journey and payment can lead to high costs.

They are increasingly aware of the risks of working with direct-to-consumer BNPL providers to sacrifice customer relationships and relinquish data ownership.

By offering a white label solution from banks and lenders, merchants can retain their customers and data and grow their brand.

For example, Wayfair and BJ’s Wholesale Club are business partners of Citizens Pay and already use this type of BNPL solution.

Fair, Affordable and Responsible Lending Practices

This subject is vital in light of the recent investigation by the US Consumer Financial Protection Bureau (CFPB), announced in December 2021.

Retailers no longer want to let a large external fintech provider dictate the rules for their payment solutions, or sacrifice their brand reputation if something goes wrong due to irresponsible lending practices.

Instead, they seek to strengthen consumer purchasing power with access to responsible and affordable financing.

Therefore, we will see quite a dramatic shift by merchants to offer regulated BNPL products through banks or white label BNPL fintech providers that adhere to regulatory best practices and promise the customer financial accountability and transparency.

No more one-size-fits-all BNPL solutions

As consumers with a wide range of credit profiles are buying various products at different ticket sizes, it’s clear that out-of-the-box BNPL offerings from fintechs won’t be enough.

To drive customer retention, acquisition, and conversion, merchants need options to meet every use case, consumer journey, and geographic market instead of plastering payment solutions.

Merchants and banks are now turning to white label platforms where they can get the ability to provide a full range of BNPL products, from installment loans and lines of credit to split payments.

According to specific merchant requirements and branding, there is an increasing demand for personalized payment solutions.

We will see the most prominent online retailers looking for multi-lender or cascade BNPL solutions, as not all consumers are eligible for prime lender funding from banks and Tier 1 lenders.

Waterfall consumer funding works by cascading consumer applicants from primary lenders to secondary lenders through a single funding request to increase BNPL approval rates and customer conversions.

Being part of a multi-lender network will enable banks to meet the diverse needs of merchants and consumers.

Banks will be able to approve and service consumers who meet their specific credit profile requirements while maintaining merchant and consumer satisfaction with BNPL acceptance rates.

In my experience, banks are often looking for solutions that are easy to integrate but highly configurable, with different modules to move and use as needed.

With their well-deserved reputation and deep roots in the financial sector, banks that offer agile BNPL solutions to meet consumer and merchant demand for personalization will be the most sustainable BNPL model.

Banking on the BNPL in 2022

These trends, coupled with growing interest from regulators, place banks in a unique position to compete with fintechs for merchant and consumer interest.

While BNPL’s fintech businesses have seen a jolt of late, with fintech shutdowns and stock declines, banks’ Buy Now Pay Later solutions are here to stay.