Smaller banks’ BNPL hesitancy opens door for provider partnerships

The news: An overwhelming majority of smaller banks are eschewing the buy now, pay later (BNPL) market, per American Banker, citing an IntraFi Network survey showing that 81% have little or no interest in it.

More on this: The publication reported a mere 2% replied that they’re currently offering BNPL or plan on doing so. Respondents that expressed future interest split into two categories:

• Fourteen percent said they were interested in jumping in but want to do so by partnering up.
• Just 3% voiced interest in entering BNPL by themselves.

Per American Banker, the survey was taken last month and sampled important executives at banks with up to $10 billion worth of assets.

The publication points out that some smaller banks are skeptical of BNPL, and quoted Cullen/Frost Banker CEO Phil Green sarcastically asking, “What could go wrong there, right?”

American Banker also highlighted the regulatory scrutiny that BNPL is receiving in the US, where the Consumer Financial Protection Bureau (CFPB) is launching an inquiry into five major dedicated players.

BNPL is ripe for banks’ entry: Smaller banks are staying clear of a market where incumbents in general could make significant inroads with consumers:

• A PYMNTS US survey found that 70.2% of respondents who currently use BNPL said they would be “more interested” in BNPL products backed by banks versus those offered by standalone providers.
• Almost 43% of overall consumer respondents voiced interest in bank-backed BNPL.

PYMNTS also found that the three biggest US standalone BNPL providers are vulnerable to losing market share to banks:

• Afterpay was first in its market share survey, with 44% of respondents using it for their online shopping and 47% for in-person transactions. However, almost 79% of the company’s users replied that they would be “more interested” in bank-offered BNPL.
• PayPal was second, with 44% for online users and 43% in-person. However, 84% of its users expressed the same openness to bank-backed BNPL.
• Klarna was third, with 38% for online usage and 41% in-person. However, 82% of its users expressed interest in using bank-offered BNPL.

The big takeaway: The BNPL market is poised to grow significantly in the US, per our forecasting, jumping from 45.1 million users in 2021 to 76.6 million in 2025. Smaller banks that forego BNPL are passing up a significant business opportunity that could increase their customer base and add to the upsell potential for other incumbent-issued products.

But the potential compliance headaches suggest that partnerships are the most practical route to entry. Vendors in this space have an opportunity to grow within the US. Just as an example:

• Mastercard is rolling out a BNPL-support product, Mastercard Installments, which will include partner lenders. The payments giant’s solution could make underwriting for BNPL less risky because it collects information including cash-flow data for setting repayment terms. Mastercard’s collaborative arrangements could also help it proactively deal with regulations, which may encourage smaller banks to use the service after seeing how it initially fares.
• Amount offers BNPL solutions to clients including regional banks and credit unions. The fintech uses models for verification and fraud, and notes its staff’s compliance experience.
• Fintech Jifiti’s “white-labeled” BNPL product includes one integration for lenders to serve merchants. It also assumes overhead from banks so they don’t have to update the merchants they use for programs.