Why banks should leverage BNPL in 2024

by Carolina Soares, lead service designer, Vacuumlabs

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The financial world is rapidly evolving, driven by changing consumer needs and technological advancements. The Buy Now, Pay Later (BNPL) sector is experiencing a remarkable rise in Europe and is forecasted to reach an impressive €300 billion by 2025. When the term BNPL is mentioned, names like Klarna and Affirm likely come to mind. These companies specialise in providing BNPL financing options for purchases at participating retailers. However, is this path easy for all? Some BNPL providers are currently facing significant challenges.

This is where banks and payment platforms have a chance to shine. By refreshing their BNPL or credit offering with the help of a payments vendor, banks can offer consumers a unique way to pay. 

This transition point represents a unique opportunity to redefine credit offerings and assert relevance and competitiveness in the market.

In this article, we delve into the dynamic financial terrain, highlighting the surge of Buy Now, Pay Later (BNPL) services and elucidating the distinctive advantages that a BNPL app tailored for banks can bring. The article outlines strategic steps for banks, underscores the role of digital innovation, and envisions the future of payments alongside the growth of BNPL.

Understanding the BNPL phenomenon

The rise in e-commerce transactions during the COVID-19 lockdowns led to a significant increase in Buy Now, Pay Later (BNPL) services, contributing to the growing demand.

The competition among Buy Now, Pay Later (BNPL) apps is reshaping the European mobile BNPL market landscape. In recent quarters, traditional BNPL apps – such as Klarna, Clearpay, and Affirm – have achieved nearly 10 million installs together in the first half of 2022. These services have become popular mainly with Millennials and Gen Z because they provide a fast and frequently interest-free method to pay for purchases over a period of time. 

However, concerns have arisen about the potential financial risks of pure-play BNPL companies. Unlike traditional financial institutions, BNPL providers are not required to conduct “ability to pay” evaluations or provide consumers with truth-in-lending statements. This lack of scrutiny raises the possibility of increased debt accumulation and financial distress for certain users. 

Here is where the opportunity comes in for new players 

Pure-play BNPL providers face challenges due to inadequate creditworthiness assessments, leading to financial struggles and unprofitability. This vulnerability in the BNPL model highlights a significant opportunity for banks and other payment platforms. 

Banks are prepared to handle financial risks

With established processes for assessing creditworthiness, banks are well-equipped to manage financial risks. They know precisely to whom they can lend money, a capability where typical BNPL providers may struggle. By adopting a more consumer-centric approach, banks can maintain their position in the credit market and address the potential risks associated with BNPL services.

Banks are under regulatory and legal requirements, ensure transparent consumer reports

Banks, bound by regulatory and legal mandates, adhere to robust reporting requirements, ensuring transparency and user safety. In contrast, many non-bank Buy Now, Pay Later (BNPL) companies have provided incomplete or, in some cases, no information to nationwide consumer reporting agencies. BNPL providers must report positive data to promote consumer financial wellness.

Banks are the user’s preferred BNPL provider

Carolina Soares, lead service designer, Vacuumlabs

Trust plays a vital role in making financial decisions, and financial institutions have gained considerable trust from their current customers. A survey by The Financial Brand found that 78% of respondents say they would be more likely to use buy now, pay later financing options offered by banks with which they already have an account.

Banks provide more flexibility than BNPL services, which often restrict users to select merchant agreements. The combination of this adaptability and the trust people have in banks puts them in a leading position in the BNPL market.

Banks can build BNPL products/ features, taking advantage of their reputation, existing user relations, and functionalities (e.g. credit assessment, payment in physical stores, an overview of accounts, etc.).

A BNPL solution offered by banks

Analysing the current market, product opportunities, and user needs in the current landscape, we identified that banks are well suited to offer BNPL and developed an idea that can assist banks in shaping their BNPL offerings. The main idea is this: A BNLP product for banks, with no merchant dependency and powered by payment processors.

A BNPL product can empower users to make credit purchases in online and offline stores and manage their repayments directly through the app. Customers can choose the specific amount of their instalment for each purchase, which is a departure from most credit cards that only allow the management of purchases in a bundle. 

In addition, there is a need for a clear and transparent service that is free from hidden fees, confusing interest rates, and lack of visibility into payment details.

This is the product option that your bank can use to its advantage. It’s a level of flexibility your customers won’t find in traditional credit cards.

Choose distinction, choose a new era of BNPL

The rise of BNPL services marks a new chapter in consumer finance. By integrating BNPL functionalities and building new BNPL products, banks and payment platforms can work together to offer products that resonate with modern consumers’ desire for flexibility, transparency, and convenience. The advantages gained from offering BNPL services position banks to meet today’s market needs and establish new standards in the evolving consumer finance landscape.


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