Buy now, pay later (BNPL) – consumer financing at the point of sale (POS) – is fueled by an easy, convenient, and digitally-enabled payment and credit value proposition proliferated by fintechs.
But banks, traditional lenders, and payment processing companies are increasingly moving into the space to support growing market demands and compete with fintechs who have already diverted $8-10billion in revenue away from banks.
In light of this growth, Yaacov Martin, CEO and co-founder of Jifiti discusses the growing calls for regulation in the BNPL industry, and how consolidation provides the answer.
While BNPL is appealing for retailer growth, it has also attracted more attention from payment companies and banks, leading to a series of acquisitions in recent months; Square spent $29billion to buy Afterpay, PayPal is paying $2.7billion for Japanese upstart Paidy, and Goldman Sachs bought GreenSky for $2.2billion.
These latest acquisitions and consolidations are bold signals that the BNPL market is booming – and more growth is on the horizon. But as the number of brands and users in the BNPL arena continues to grow, the largely unregulated nature of the BNPL explosion has garnered the attention of regulators.
Financial regulators are sitting up and taking notice, not because of the consolidation itself but because these collaborations are an indication that the industry is one to be taken seriously and is here to stay.
Regulation Has Jumped to Top of Mind
An industry becomes of interest to the regulator when debt is untrackable, the sector shows signs of growth, and big names jump on the bandwagon.
“It’s going to get more regulated, and it should be more regulated,” said Mark Barnett, Mastercard’s president for Europe, in an interview with the Financial Times. “Nobody wants over-indebted consumers. The people who are best able to make sure consumers are able to repay are banks.”
Fintechs are aware of this fact, and collaborating with banks that are already regulated is a tactic that can serve fintech companies well when the time comes for them to comply. For example, Lloyds Bank is famous for partnering with fintechs and has spent £4billion over the last few years on wide-ranging digital transformation projects.
In February 2021, a government review of unregulated consumer credit carried out for the United Kingdom’s Financial Conduct Authority (FCA) highlighted the BNPL industry’s exponential growth needing regulatory oversight. The Business Plan released in July stated that one of its top priorities for the next year would be to ensure that consumer credit markets work well by reviewing consumer credit in areas such as the BNPL sector.
The UK government wants to regulate BNPL in a way that is proportionate to the risks and is looking for feedback on how to do it.
Meanwhile, Australia’s Treasurer, Josh Frydenberg, recently announced several proposals to update Australia’s regulatory framework for payment systems, including BNPL, which remained largely unchanged over 25 years. This will allow the government to oversee payments policy and retain sovereignty over payment systems. If the Australian government achieves the optimal balance between regulating the industry without stifling innovation, this could serve as a roadmap for regulation in other countries.
Due to these recent updates, and since more than 17 million UK customers alone use BNPL to make online purchases, this is a clear indication that governments are feeling the heat of the industry and want regulation in place so consumers can ultimately benefit.
Consolidation to Meet Shifting Demands
As more people enter the digital economy, payments and consumer financing are evolving, providing increased payment flexibility and cash flow management while empowering retailers to offer modern, innovative payment methods at checkout.
Furthermore, due to customer demand for integrated experiences, embedded finance and banking-as-a-service trends – where non-bank companies offer financial services – are catching on. Take IKEA’s 2021 announcement that it was purchasing 49 per cent of its banking partner, Ikano Bank.
Banks are weighing up the different roles they could play, questioning whether distributing products through partners will threaten their client relationships. There is also the issue of value alignment; banks are increasingly considering whether third-party financial services align with responsible lending and other core banking values. As a result, many are looking to solutions that give them direct access to merchants and consumers.
To meet the aforementioned shifting consumer demands, there has been a spike in consolidation and partnerships in the BNPL industry over the past 12 months.
The idea behind these consolidations between fintechs and banks is to bridge the gap between merchants, consumers, and lenders in a secure and efficient way. For example, by partnering with a white-labeled BNPL solution provider, banks could seamlessly integrate BNPL offerings into their consumer financing programs and help merchants incorporate BNPL into their customer journeys in a responsible way.
Fintechs benefit from collaboration with banks by meeting upcoming regulatory requirements, but what do banks have to gain? It all boils down to technology. Banks collaborate with fintechs to bring their already-compliant products and services to the POS with the speed and agility of a fintech. To onboard merchants at scale and move forward with the direction of the industry, banks need to partner with the wider consumer financing ecosystem to deliver innovative financing solutions and payment options at the moment consumers are seeking them.
With the jump in interest from regulators last year, especially the Consumer Financial Protection Bureau scrutinising the business practices of Affirm, Afterpay, Klarna, PayPal, and Zip, there is an obvious reason why we’ve witnessed consolidations and acquisitions skyrocketing. It is a win-win situation; these partnerships benefit both fintechs and banks in the long term and quickly solve any regulatory issues. This will ultimately benefit consumers by giving them access to responsible, accessible, and affordable financing solutions.