Mercator Blog

BNPL: The Empire Strikes Back
Date: September 22, 2021
Brian Riley
Director, Credit Advisory Service

As Buy Now, Pay Later continues to gain adoption, borrowers are aligning with prominent lenders, not just shiny new fintechs. Traditional financial service firms do not intend to forget their core banking skills and are ready to revitalize installment lending. From a technical standpoint, BNPL involves light coding; from an operational perspective, it means more but smaller loans than an established, revolving credit line.

Top private label credit card (PLCC) issuers, typically non-banks that offer closed-loop credit, are also defending their market, as evidenced by Synchrony's recently announced "Pay-in 4" offering. Alliance Data Systems (ADS), another player in the PLCC space, bet heavily with their acquisition of Bread, reportedly at $450 million. Although ADS has yet to make a real splash in the BNPL market, they are well-aligned with Fiserv and RBC, and it is public knowledge that they will launch something in late 2021, with a total rollout in 2022.

Top U.S. banks defined their space early in the BNPL cycle, with post-transaction offerings by American Express, Citi, and Chase, but it appears that they will be moving upstream with merchant point-of-sale offerings. Capital One recently announced its new BNPL product via a test with selected merchants and cardholders. Chase, with its massive acquiring business, also looks like it is poised for a new offering. Now, U.S. Bank is testing BNPL, to add to its wide range of payment offerings, including a suite of cards, a white label business for small banks, and Elevon, its merchant powerhouse.

Lay all that newly generated activity on top of PayPal's ability to execute BNPL for its 400 million-person global network, Square's acquisition of Afterpay, Apple's reporting of a play with Goldman Sachs, and even Amazon and Affirm in a targeted test, BNPL is about to shift from being an offering by creative fintechs to a mainstream banking product.

If you had a chance to read the Mercator report "Credit Card Lenders: Hone Strategies and Do Not Let Fintechs Scare You," you would know we predicted this move in late 2019. In short, the BNPL concept is good, but it cannot just center on unbridled lending. The BNPL function must consider discipline, process, and structure, like any other consumer lending function. When it comes to lending, two words resonate with every regulator: safety and soundness.

All these events bring us back to Australia, the epicenter for BNPL. Sure, Klarna comes from the Nordic region and claims to have 90 million customers globally, but the firm is not yet producing net income, as you can see from their financials. Even with a 53% spike in YoY gross merchandise volume, the net income statements still suffer substantial losses thanks to pricing and credit-risk issues. As a result, plenty of red ink appears in their income statement.

Indeed, the prospects of BNPL are exciting, but how long can operational losses be an acceptable way to sustain business? No top financial institution would be around long with credit losses that outweighed net earnings. Financial institutions need to stick to what they are good at and focus on credit management, as we said early in the BNPL adoption cycle. Consumer credit requires a long view of the customer, their household and lifecycle needs, and a focus on lower risk lending. Fundamentally, credit is about risk management, not merchant sales.