Picture of Frederrick Hamann
Frederrick Hamann

BNPL grabs consumer loans from banks

Buy Now, Pay Later (BNPL) is booming. This new way of taking consumer loans is cutting into the revenue streams of banks. Here’s how they can react.

Imagine a young customer who wants to buy a new computer, but does not currently have the finances. To get a loan from a traditional lender, they would have to apply for a personal loan in a physical branch, print out documents, and wait weeks to get their loan approved. In the best-case scenario, they might be able to carry out the process online. With a Buy Now, Pay Later (BNPL) solution, however, the same process of buying a new computer is vastly different. The young customer can simply choose the new computer in a webshop and apply for paying for the device in multiple instalments. All this without ever exiting the interface of the e-commerce platform.

Nowadays, customers can purchase anything almost instantly. So 18-34-year-olds got used to one-day shipping, food delivery to their doors, banking from their phone, and a lot more. When managing their finances, they expect the kind of experience they got used to when using services from other industries. That is the reason why the young generation is the driving force behind the rise of BNPL. 57% of this age group feel that BNPL is a smarter way to shop, while 37% say it gives them more control of their finances, according to PayPal. The finance industry must be aware that 18-34-year-olds will soon become the majority market segment of the consumer loan market. And they already demand better usability.

Losing the interface battle

BNPL lenders integrating their service at the point-of-sale makes a significant difference. For example, Klarna’s service is integrated into e-commerce merchants’ checkout processes. Thus making its offers visible at the precise time consumers need a loan. And Klarna is not the only one with a point-of-sale interface. Affirm recently announced that its service will be implemented in Amazon’s checkout cart, serving millions of customers. At the same time, finance veterans such as PayPal, Visa and new players like Revolut and Lunar are also entering the market.

What makes the placement of BNPL even more important is its contrast to the solutions that dominated the consumer loan market for years. Even today, 65% of global banks do not provide an end-to-end digital journey for getting a consumer loan, according to Deloitte. On the other hand, BNPL is fully digital with a modern customer journey. The contrast is so significant that retail banks need to act now or risk losing their interface to a competitor. Likely a BNPL solution.

The rise of Buy Now, Pay Later

Buy Now, Pay Later is skyrocketing. And it grows to the disadvantage of traditional consumer lending structures and global retail banks. Today, BNPL already accounts for 14% of all US retail e-commerce sales, and this figure is expected to grow to 18% by 2024. This might seem like only a slight increase. However, it is necessary to highlight that e-commerce sale is also experiencing significant growth. This means that the volume of Buy Now, Pay Later in the US could grow by 90% to reach a valuation of close to $200 billion by 2024, according to Business Insider.

Business Insider expects BNPL’s market share of e-commerce transactions to double by 2024. A growth of this magnitude means that Buy Now, Pay Later is on a steady pace to become more and more prominent while reducing the value of traditional consumer loans at the same time. This is disturbing news for retail banks around the globe, as BNPL is expected to divert up to 2% of global retail banking revenue annually, according to McKinsey. As BNPL is expanding much faster than other types of lending, traditional banks have to act now. Otherwise, Buy Now, Pay Later will slowly eat up their consumer loan revenue.

How should traditional banks react?

A good place to start would be to understand the behaviour of their customers. Banks handle a vast amount of payment data. This data can detect if customers have loans from non-traditional lenders such as Buy Now, Pay Later providers. Data from Subaio shows that 5-15% of bank users have a consumer loan from non-financial players like Klarna, Affirm, and Afterpay. However, banks are unaware of this information as they do not detect these loans.

Nevertheless, traditional banks can quickly turn this situation to their advantage with a service that detects these loans. Such a service already exists. Subaio’s solution can identify these loans from payment data and provide additional insights. With the average consumer loan size being more than €10.000 in Europe, this is a massive opportunity for retail banks to convert BNPL loans from their current clients to their own financial products.

The solution delivers actionable insights such as the provider, start date, and size of consumer loans. Insights like this enable banks to provide personalised offers that are more likely to convert. For instance, when a high interest rate BNPL loan is recognised, the traditional bank could provide a better offer to their customer with a lower interest rate. This way, the solution grants banks an opportunity to activate a hidden revenue stream in consumer loans while offering a solution to the threat of Buy Now, Pay Later.

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