Does BNPL make sense for banks?

Buy now, pay later has become a popular payment option for consumers in recent years, as it offers a convenient way to spread the cost of purchases over multiple installments.

But with higher interest rates, questions have arisen about the long-term viability of interest-free financing. While some argue that BNPL may not make sense in this environment, others believe that there may be opportunities for banks to enter the market with their own BNPL services.

During the low-rate period, BNPL companies had the opportunity to expand their operations through aggressive marketing and attractive offers. However, in a higher-rate environment, zero-interest installment loans make less sense. As a result, some BNPL firms have introduced interest rates for consumers ranging from 10% to 36%. Meanwhile, regulators have raised concerns over potential risks associated with BNPL, including the possibility of consumers overextending themselves and accumulating debt. These concerns could lead to increased scrutiny and regulation of the industry.

Some banks are exploring opportunities to enter the BNPL market, seeing it as a potential source of new revenue. There are a few scenarios where BNPL can be a fit for banks. To be a financing institution for BNPL, banks will need to consider their exposure and risk management. If they are extending lines of credit or BNPL, that means they will have exposure around that.

A less risky way for banks to get into BNPL is for them to integrate it into their own apps. By doing so, banks can provide a more seamless and convenient payment option for their customers, who may be more inclined to use BNPL if it is a part of their existing banking app. BNPL companies should also promote this offering to encourage more banks to integrate their service. By doing this, banks can benefit from the additional revenue stream that BNPL provides without taking on as much risk.

BNPL is a payment option that is more focused on financing individual transactions, rather than financing all transactions on a revolving nature. It is a subset of banking that may be better suited to banks heavily involved in retail, as they often have relationships with retailers and are better positioned to provide the necessary infrastructure for BNPL.

For instance, there are retail banks that already support retailers, and BNPL can be an added payment option to the existing payment suite. Additionally, in situations where there are one-off transactions that are larger, BNPL may be more suitable than credit cards. BNPL can be a lucrative opportunity for banks that have deep relationships with retailers, and who can provide the necessary infrastructure and expertise to support it.

For many banks, there isn’t a dedicated team working with retailers to integrate BNPL at the point of sale. Without the necessary infrastructure, including credit, underwriting, collection, and servicing, it can be challenging for banks to support retailers offering BNPL. This has led to the emergence of new banks that have built the infrastructure necessary to support BNPL themselves.

As BNPL services become more established and expand their offerings, they may start to introduce more credit-like features, such as higher interest rates, fees and credit checks. Furthermore, regulators may also push them to follow certain laws applicable to credit cards, such as dispute resolution, credit bureau reporting and checking for ability to pay. BNPL providers may also start offering rewards or cashback programs, which are common features of credit cards. It will be interesting to see the evolution, but it looks like the line between BNPL and credit cards is already starting to blur.

Whether it makes sense for banks to enter the BNPL market will depend on a variety of factors, including their existing business models, customer base and infrastructure. While some banks may see opportunities to successfully enter the BNPL market, it may not make sense for all banks to do so. Ultimately, banks will need to carefully evaluate the potential risks and rewards of entering the BNPL market, and make a decision based on their unique circumstances.

Anil Goyal is CEO at Corserv.