Buy Now, Pay Later – What’s all the fuss, and how do banks respond?

Square afterpay logos

Square has just announced its intent to spend more than the average bank’s annual revenue on a BNPL provider, Afterpay. Is this a one-off, or a trend to be aware of?

Buy Now, Pay Later (BNPL) as a payment method has been making headlines for several years now – and gaining attention from both proponents and sceptics alike. This week’s news of Square’s intention to buy Afterpay at a price point that supersedes the value and revenues of many banks demonstrates the value of these services, and the disruption they are causing in payments.

However, the value and market shift that BNPL providers embody is far bigger than payments. A lot of the debate around these providers to date has focussed on consumer protection vs. Innovation. Is this just a new credit risk for consumers or is it in fact fintechs responding to a legacy of underserved consumers? What is going relatively under-reported is the fact that BNPL providers have the potential to redefine banking for both consumers and merchants alike. This week’s announcement cements the shifting tide in what it means to be a bank – for consumers and for merchants.

BNPL providers aren’t picking off pieces of the value chain from banks, they are redefining the banking landscape

A disruptive business model is emerging within BNPL providers that is less likely to be disturbed by potential consumer regulations or fee caps. This business model focuses on charging the merchant, not the consumer, for access to BNPL. The model works on providing merchants with a payment method that increases revenues (sales and basket value) by enabling the consumer to manage their payment over time. For the merchant, incredible statistics like an 35% increase in basket conversion or a 30% higher total basket value are persuasive enough for them to subscribe to a provider for a monthly fee, and a % per transaction. These business models only make money off consumers who do not keep up repayment.

This business model not only shifts BNPL away from being a potential consumer credit risk and limits the risk to business model of any potential consumer protection regulation; it also focuses in on the majorly underserved merchant audience and creates direct relationships with merchants of all sizes. Creating these relationships with merchants, that focus on driving revenues, creates permission to offer more products and services.

BNPL providers aren’t stopping at redefining business banking, they are taking on the whole banking ecosystem

Where banks have previously been the only holders of consumer and business banking relationships, BNPL providers are entering this space and demonstrating the value of connecting the two audiences, in a way that banks have historically struggled to unlock.

For this business model to work, BNPL providers have to ensure access to a consumer base. For a long time, merchants have been underserved by banks, who haven’t found a sustainable business model to support their complex needs when they are often low-value customers. BNPL providers have found a new route to value for these audiences, through connecting merchants to consumers. BNPL providers are creating a single, two-sided marketplace to connect people that want to buy to businesses that have things to sell, underpinned by the payment and management services to facilitate this purchase.

The ability to understand and connect consumers and businesses was previously only held by the banks, but totally underutilised. BNPL providers that are adopting this disruptive business model have been vocal about their intentions to leverage these relationships to create a one-stop shop for consumer personal financial management, and merchant cash flow and revenue generation.

The real power in these two-sided marketplaces is the ability to create cross-audience services like loyalty and rewards offerings that connect their consumer and merchant audiences in deeper, more engaging relationships; and empower merchants with data to drive offers, rewards, and make business decisions. Connecting consumers to merchants around a common need (items for sale) rather than the underlying payment method, continues to push banking into the service/enabler space.

It requires an understanding of marketplaces, personal financial management, and business management over product and credit risk. In other words, it requires expertise that isn’t the usual stronghold of banks but enabled by banking.

What do banks need to do to respond?

So, is this just a nail in the coffin for business banking? Does this prove the theory that banking is heading into an infrastructure-only service? In order to maintain and sustain merchant relationships, BNPL providers will need to look to support the merchant in managing their whole business.  

This requires a more holistic view of the business. The Square/Afterpay integration, and Klarna’s application for a banking license and strategic relationships with retailers to process all their payment types demonstrates how these providers are looking for access to the full view of payments for banks. A full view of payments allows for better reconciliation and settlement views.

However, there is still a role for banks to play as the single source in truth of the full incomings and outgoings view of a business. Banks are also able to serve complex product needs – lending, advances and cash flow management services are still the stronghold of the banks, and can be utilised to support a business more broadly.   

Square and Klarna as a bank have the opportunity to start to move into this space. For banks, this is about speed-to-market and rigour of products. Banks have the opportunity to work with BNPL providers to leverage their individual strengths: banks – the products, data and regulatory compliance, and BNPL providers – the experiences, interfaces and innovative services. Again, this demonstrates the need for banks to find partners, not providers, to enable services that meet a shifting consumer and business perception of what their banks should be able to do for them.

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