The Remedy Blog

The Buy Now Pay Later(BNPL) industry is starting to mature. For those of you who don’t follow the BNPL industry closely, you at least should know that BNPL is a fintech trend where financing is being offered on everyday purchases. By making a few installment payments, consumers can now purchase products that they might normally have either had to save up for or put on their credit card.

Banks and credit unions have seen lending centers offer unsecured loans for decades, so many of them see BNPL providers as the modern-day version of Rent-a-Center, the old Kmart layaway plans, or even payday lenders. Get something now and pay later is not really a new trend.

However, if you manage a regulated financial institution, there are a few parts of this BNPL business model that may be of interest to you:

1. How BNPL Providers Make their Money.

The business model of these BNPL fintechs are interesting. Each BNPL fintech has a slightly different approach, but their revenue is achieved (generally) in one of five ways:

• Discounting by the merchant
• Reduction in card-based interchange fees to the merchant
• High Interest rate to the consumer
• Other financing fees to the consumer
• Late payment/missed payment fees

The BNPL provider develops a piece of code that integrates right into the eCommerce website of the merchant. They set some parameters (ie. offer financing for items purchased with a value over $500 only), and without even asking for detailed credit information from most of the consumers, they offer a loan.

Now, since small loans with payback periods of less than 12 months are not terribly desirable loans, most of the BNPL providers have supplemented their income by getting participation from the merchants. Think of it this way, if Walmart can move more TVs using BNPL than if consumers had to save the money before buying, what would that be worth to Walmart? 5%? of the value of the TV? Each merchant might value the BNPL sale differently, but the bottom line is that the BNPL providers have gotten merchants to sell at a discount and then offer the difference back to the BNPL provider to support the administration of the BNPL program.

The second, closely related revenue stream for the BNPL provider is that they have eliminated the credit or debit card payment for the product, meaning that merchants no longer have to pay traditional interchange fees to the card issuer or card network provider. If the merchants are willing to contribute part of the interchange that they would normally have paid to the BNPL provider in the form of an incentive, the BNPL financial model looks a bit more interesting than a payday lender interested in lending small dollar amounts.

If you manage a financial institution, you know that your organization is the recipient of some of that interchange revenue, so eliminating payment of the interchange fee may end up diverting revenue from your organization.

2. Scalability and Reaching New Customers

Another interesting part of the BNPL model is the fact that BNPL providers have found a new channel for reaching new customers. Where most community financial institutions think of their own website and mobile or online experience as their primary way to recruit new customers, the BNPL provider is actually recruiting new loan customers from inside the merchant’s eCommerce store. When you think of multi-channel marketing, this is really a good example. The customer does not have to find the BNPL provider, because the merchant is sending new customers directly to the BNPL provider.

In some cases, when customers come to the brick-and-mortar site of the merchant, customers are being diverted to a separate BNPL site for the loan. This is another channel (store visits) to pick up lending customers. Compare this to your Marketing team’s mailers and hope new lending customers land on your financial web page through your internal marketing efforts.

If you put aside the fact that small loans with quick payback periods to potentially high-risk individuals may not be of great interest to your FI, the concept of using a merchant’s website that already has strong traffic to win your FI new clients is a creative idea. Anyone who has ever tried to recruit traffic to a website via Search Engine Optimization and other techniques would drool over this cross-brand client generation opportunity.

3. Credit Agency Reporting

Up until recently, BNPL providers were not responsible for reporting to credit agencies on the payment histories of their clients. Some were not even requiring a full credit check when signing customers up for the BNPL loan.

In the early days of the BNPL industry, the fledgling BNPL providers must have anticipated that the loan amounts were small, interest rates and fees were high, and the payback periods were short, so their risk of default was low and profits high. Maybe they felt that they could lock down consumer credit histories later in the process once they had secured enough merchant partners to send them business.

The result of this lack of oversight has been that customers with credit problems had the ability to take out multiple BNPL loans without being as concerned over other outstanding balances for other loans or credit cards. As we all know, this is not a great model and can easily lead to an over-extension of credit and the inability of the borrower to pay back any of their loans, even those that were secured with other lenders.

One of the recent trends in the BNPL industry is a greater scrutiny on credit reporting, at least to the extent that the credit agencies can see how many BNPL loans an individual has alongside the other more traditional loan obligations that currently require reporting to the credit agencies. Improved credit reporting should be a positive for community financial institutions that want to make more informed lending decisions.

Whether or not you keep up with the BNPL industry, there are some interesting trends that community financial institutions should follow within this industry that affect your lending policies and revenue such as your interchange fees collected. Whether you love or hate the concept of BNPL, these fintechs have created an interesting new marketing and revenue models which should get traditional community financial institutions to take notice.