Banks look for growth in buy-now-pay-later market

When Klar­na launched its buy now, pay lat­er (BNPL) ser­vice in the UK in 2016, point of sale inter­est-free cred­it looked like a sideshow. But with the pay­ment method attract­ing grow­ing inter­est from con­sumers and retail­ers, incum­bent banks like NatWest are now enter­ing the field. 

It’s still ear­ly days for BNPL, which remains dwarfed by the cred­it card mar­ket. There are cur­rent­ly 35 mil­lion active cred­it cards in the UK, accord­ing to UK Finance, with £16.2bn spent in Jan­u­ary 2022 alone. BNPL, on the oth­er hand, was used at least once by around 15 mil­lion peo­ple, or around 28% of the adult pop­u­la­tion in Octo­ber 2021, accord­ing to Equifax, with the aver­age user repay­ing £125.32. That sug­gests over­all BNPL lend­ing is around one-tenth that on cred­it cards. 

How­ev­er, banks are keen to tap into the new mar­ket. NatWest looks set to be the first incum­bent bank to enter the BNPL are­na, launch­ing a new prod­uct this sum­mer. It promis­es to bring one of the main advan­tages of a cred­it card to BNPL: “con­sumer pro­tec­tion on all pur­chas­es”. BNPL will also be part of the NatWest mobile app, with the aim of offer­ing an “effort­less” cus­tomer expe­ri­ence.  

The bank strikes back

NatWest hasn’t giv­en details of what it might charge retail­ers. How­ev­er, it’s pos­si­ble that its size could help it under­cut fin­tech BNPL providers. It may also have anoth­er advan­tage: incum­bents know how to com­ply with reg­u­la­tion. 

NatWest won’t be alone. Mon­zo was the first UK bank to enter BNPL with ‘Mon­zo Flex’ at the end of last year. This pro­vides inter­est-free pay­ments over three instal­ments, though it has an inter­est rate of 19% APR when the cus­tomer choos­es six or 12 instal­ments. From a con­sumer point of view, this is sim­i­lar to a cred­it card.

BNPL could eat into a much big­ger, estab­lished busi­ness – so why are banks inter­est­ed? 

It comes down to con­sumer expec­ta­tion, increas­ing choice, and why BNPL took off in the first place. 

BNPL attracts con­sumers part­ly because it’s acces­si­ble to peo­ple who can’t get a cred­it card or don’t want a hard cred­it check. In the UK, it still comes under rules that allow infor­mal cred­it agree­ments – for exam­ple, set­tling up with a newsagent at the end of the week – though that will short­ly change. Main­ly, how­ev­er, it’s because it’s cheap­er and less has­sle. 

It’s par­tic­u­lar­ly impor­tant that BNPL costs less than a cred­it card or an over­draft, accord­ing to a sur­vey by Bain. Some BNPL providers, like Klar­na, charge no inter­est and no late repay­ment fees on small­er sums. Klar­na has a reg­u­lat­ed cred­it offer for larg­er amounts that does charge inter­est, but there is a fixed total cost and no revolv­ing cred­it. 

In con­trast, the aver­age cost of cred­it card bor­row­ing was 18.28% in Jan­u­ary 2022, while the effec­tive inter­est rate on over­drafts was 20.83%, accord­ing to the Bank of Eng­land.

Klar­na has described the cred­it card mar­kets as “rigged” against both mer­chants and con­sumers and only work­ing in favour of the banks that extract exces­sive fees. It’s not the only fin­tech that sees a busi­ness oppor­tu­ni­ty in the mar­gins of incum­bent play­ers and in bet­ter cus­tomer ser­vice. 

“Buy now, pay lat­er can absolute­ly dis­place cred­it cards in the UK,” says Shachar Bial­ick, the founder and CEO of Curve, which aggre­gates mul­ti­ple cards in one card and one app and also offers BNPL. 

The BNPL benefit

BNPL offers a range of oth­er advan­tages. Card providers like Visa, which have big economies of scale, charge retail­ers under 2% for the cred­it ser­vice. BNPL can demand more than twice as much. 

On the sur­face, that seems poten­tial­ly off-putting for retail­ers, who have long com­plained about exces­sive card charges. How­ev­er, BNPL’s mag­ic sauce is that it boosts sales when com­pared with oth­er pay­ment options. That mat­ters in an online world where the com­pe­ti­tion is just a click away. Bain says that around 57% of mer­chants see an increase in ‘bas­ket con­ver­sion’ and about 46% expe­ri­enced an increase in order val­ue. 

BNPL also attracts a broad­er range of con­sumers, includ­ing the less well-off. All in all, retail­ers find that BNPL pays for itself even if it comes with a high­er per­cent­age fee than a card pay­ment. The bot­tom line is that con­sumers flock to such solu­tions, mean­ing both retail­ers and banks will increas­ing­ly have to pro­vide access. 

“The fin­tech sec­tor emerged out of demand for more diverse finan­cial prod­ucts that work for con­sumers as well as providers,” says Clau­dio Alvarez, part­ner at GP Bull­hound, a tech­nol­o­gy advi­so­ry and invest­ment firm. “Klar­na and oth­ers have rev­o­lu­tionised the con­sumer lend­ing space. It was only a mat­ter of time before incum­bents took notice and began adapt­ing their prod­uct offer­ing to keep in step with the new emerg­ing fin­techs.”

A radical change in retail finance

Though retail­ers are keen to offer BNPL, it’s not lucra­tive for the finance providers – at least not yet. Klar­na, the largest BNPL play­er in the UK, had glob­al rev­enues of around $1.6bn and net loss­es of around $758m in 2021 as it expand­ed. It now serves 45 coun­tries. To com­pare, Visa’s net income in 2021 was $12.3bn. 

But Klar­na, like many tech com­pa­nies, wants to reshape its whole mar­ket for the long-term, not make mon­ey now. It aims to be a major aggre­ga­tor that only takes the slimmest of mar­gins by elim­i­nat­ing what it sees as unnec­es­sary finan­cial tax­es on the econ­o­my. If it suc­ceeds, some banks will need new busi­ness mod­els.

There are also reg­u­la­to­ry issues to con­sid­er. UK reg­u­la­tors start­ed tak­ing a hard look at BNPL with the Woolard Review in Feb­ru­ary 2021. It con­clud­ed that “as a mat­ter of urgency, the FCA [Finan­cial Con­duct Author­i­ty] should work with the Trea­sury to ensure the nec­es­sary amend­ments to leg­is­la­tion are made to bring BNPL prod­ucts with­in the scope of reg­u­la­tion.” That is expect­ed this year. 

Incum­bent pay­ment firms, includ­ing banks, already com­ply with long lists of often oner­ous reg­u­la­tions on a glob­al basis. This under­pins their reach and scale. Some chal­lenger banks, on the oth­er hand, have strug­gled to keep up with the essen­tials of domes­tic mar­ket com­pli­ance, as the Pru­den­tial Reg­u­la­tion Author­i­ty recent­ly not­ed.

Banks’ deep com­pli­ance skill could be a dis­tinct advan­tage in reg­u­lat­ed BNPL. No-one has sug­gest­ed that firms like Klar­na do not run their busi­ness­es well – and Klar­na itself wel­comes reg­u­la­tion. 

How­ev­er, while some fin­tech chal­lengers are get­ting their knuck­les rapped for poor back-end process­es, incum­bents are built to respond to reg­u­la­tion. With reg­u­lat­ed BNPL, they now have a chance to step into a ready-made and grow­ing mar­ket that suits their par­tic­u­lar skills.