Banks Urged to Join Buy Now, Pay Later Trend

The surge in online and mobile shopping, accelerated by the pandemic, has propelled buy now, pay later (BNPL) payment plans to new heights of popularity among consumers and merchants alike. With BNPL generating a record $16.6 billion in November and December alone, accounting for 13% of total eCommerce holiday sales in the US according to Adobe Analytics, it’s clear that this payment method is here to stay.

Despite its growing popularity, BNPL has faced criticism from some consumer advocate groups, citing concerns about increasing debt levels. The New York Federal Reserve Bank’s study revealed that while nearly two-thirds of consumers have been offered a BNPL option when shopping online, only about three in ten have used the service. Those who do use BNPL tend to be females, renters, individuals without a college degree, lower-income individuals, and those with credit scores below 620.

Critics also point out potential downsides of BNPL, such as elevated first payment default risks and additional fees for borrowers. However, despite these concerns, BNPL activity continues to rise, challenging traditional banking models.

Banks, in particular, are facing the impact of BNPL’s popularity. As BNPL purchases often cannibalize debit card volume, banks are losing out on interchange fees. Additionally, when users pay their BNPL bill directly from their bank account or with a bank check, banks lose interchange fees as well.

To compete in the BNPL space, banks need to act fast. While larger banks like Chase have the resources to create their own BNPL programs, smaller institutions may need to rely on third-party technology providers. The risk of not competing in BNPL goes beyond lost interchange fees—it also includes deposit displacement, potential loss of credit card growth, and missed opportunities for loan growth.

In conclusion, banks cannot afford to ignore the BNPL trend. The key to success lies in embracing this payment method and leveraging their strengths, such as scale, trust, and available credit, to offer a distinctive set of differentiators through strategic partnerships. By doing so, banks can position themselves to thrive in the evolving landscape of financial services.