The rapid emergence of prominent brands in Europe has led to the rise of the leading players in the market. The growth rate has been slower in the United States, but it is expected to surpass Europe.
Fintechs are typically focused on one of the three main business models: consumer-centric apps, financial services, and traditional banking.
The rise of buy-now-pay-later (BNPL) has created a risk for banks as they lose access to the younger consumers, increasingly turning to alternative financing. While the core market continues to be dominated by younger consumers, BNPL is diversifying its customer base, including people who have used traditional credit cards before.
As a result, many of the players in the market are now offering more traditional banking services. For instance, online payment companies like PayPal have started allowing their customers to pay with their bank accounts instead of credit cards.
How traditional banks coexist with BNPL
Some banks partner with BNPL providers to offer several options, such as secured loans. This allows them to reduce their loan acquisition costs and provide customers with a quicker and easier loan process. In addition, partnering with a BNPL firm can also provide banks with additional revenue.
In response to the rising popularity of BNPL products, many of the existing players in the market have started acquiring companies providing these services. For instance, digital payments company Block Inc., formerly known as Square, in August last year announced that it would acquire Afterpay.
The acquisition would allow Block's merchant customers to accept BNPL at the point of sale. It would also enable mobile payment services like Cash App to allow users to discover these service merchants. Other players have also started offering alternative financing solutions, such as instalment loans and deferred interest products. PayPal just recently launched a new product dubbed Pay in 4.
Like a typical BNPL product, Pay in 4 offers four equal, interest-free monthly instalments. The first instalment is made immediately, while the remainder would be paid every two weeks.
BNPL affects card networks
Card networks are also developing alternative financing solutions to accept BNPL transactions. For instance, Mastercard has a solution that allows banks and other financial institutions to accept its payments.
Consumers can easily access Mastercard's various BNPL options through their bank or digital wallet apps. They can also apply for loans and receive their approval at the point of sale. In addition, Visa also allows card networks to create customised instalment plans displayed at the point of sale. This feature allows the card networks to retain their customers and continue to collect fees.
BNPL vs. credit card
For many consumers and merchants, the ease of obtaining a loan with BNPL is more appealing than using a credit card. Unlike credit cards, these products can be approved without a credit check. Unlike credit cards, which typically offer interest-free periods of up to a month, BNPL loans can usually be repaid over up to three months. This makes BNPL an appealing alternative for younger consumers, who tend to avoid using credit cards due to high interest rates.
Since these products can be used to replace credit card payments, they could reduce the profitability of credit card providers.
According to a study by management consulting firm McKinsey & Company, banks lose between $8 billion and $10 billion per year due to the decline in revenue as customers increasingly opt for BNPL products. This could also affect the profitability of card networks.
Aside from credit card networks, other financial institutions also offer alternative financing solutions. For instance, JPMorgan Chase Bank and Citigroup have launched new products that allow cardholders to pay for their purchases in fixed monthly instalments.
These products allow card-issuing banks to identify how much their customers have spent and then repay it in equal monthly instalments.