Big banks move while buy-now-pay-later (BNPL) start-ups shake.
Big banks are big for a reason; they have enormous resources at their disposal. And when it comes to some start-up rivals, they can be fast, innovative, and nimble.
Buy-now-pay-later allows online shoppers to buy something today, then pay for it over time. One of the biggest differences, though, is that many do not charge any interest as long as users make the scheduled payments. However, BNPL start-ups are discovering to their peril that competition in the online commerce space can be fierce. Many are now dealing with mounting losses and broad investor skepticism about their business models. And with big banks chasing them down, many of their business pitches are looking very shaky indeed.
Banking giants such as Natwest, HSBC, Virgin Money along with Mastercard and VISA have recently launched new ways to spread the cost of purchases as they cater to the gradual shift from credit cards to the kinds of services offered by newcomers Klarna Bank and Afterpay.
Banks are extremely well positioned to use their product expertise, brand awareness and market position to compete with these new start-ups. After all, the concept of buy-now-pay-later is little more than a re-creation of the modern-day credit card.
There will be immense competition for consumer demand online. Any start up that imagines for a second that any of the established players were going to sit back and not react was delusional.
Buy-now-pay-later providers such as Klarna and Afterpay allow customers to split online purchases via their own apps or an extra button on retailers’ checkout pages.
Over the course of the last number of years, thanks to an endless supply of investor enthusiasm and cheap credit, rapid growth was easy. However, as the cost of credit rises, those business models are under growing pressure. And with big banks getting in on the act along with rising regulatory scrutiny, dangers are multiplying fast.
In the case of Klarna, investor enthusiasm appears to be waning with its market valuation being slashed from $45 billion to $6.7 billion.
Big banks have not only far more funding, but they also have extensive merchant and customer relationships they can leverage. Also, even though the BNPL start-ups have grown under the radar of many regulators, that appears to have shifted in more recent months. Many regulators are becoming increasingly alarmed the impact BNPL could have on the financial wellbeing of users.
It is estimated that for one UK-based bank, Barclays, it’s consumer lending arm, Barclaycard earned £541 million last year.
BNPL transactions reached about $147 billion in 2021, nearly doubling in a year to represent about 2.7% of global commerce transactions, according to Global Data. It estimates this has room to rise to about 7.1% of global commerce by 2026.
Responding to the competition, NatWest announced in March of this year that it would enable its customers to spread payments over four instalments — with no interest if payments are made on time, in line with many BNPL start-ups. This was followed both HSBC and Virgin Money. Separately, Barclays, which has offered financing at retail checkouts for years, teamed up with Amazon.com Inc. late last year to provide an instalment option with the online marketplace.
Outside of the traditional banks, fintechs Monzo and Revolut both have products in this space while Apple announced in June it will offer payments in four instalments within its digital wallet, in partnership with Goldman Sachs Group Inc.
The rising popularity of BNPL also creates another risk for traditional banks — losing access to millennial and Gen Z consumers attracted to this alternative form of financing. Responding quickly with alternative offers is one way to remain on the right side of shifting consumer trends and loyalty.
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