“Buy now, pay later” tech pioneers pressed as big banks step up
Tech mavericks who have made buy-it-now, pay-later an option for buyers around the world are grappling with mounting losses and investor skepticism. Now big finance is hot on their heels.
British retail giants NatWest Group Plc, HSBC Holdings Plc, Barclays Plc and Virgin Money as well as Visa Inc. and Mastercard Inc. have recently launched new ways to spread the cost of purchases taking into account the gradual passage of cards credit to the types of services offered by newcomers Klarna Bank AB, Affirm Holdings Inc. and Afterpay.
“Even if banks are just getting started, they are well placed to scale quickly,” said Dilnisin Bayel, managing director specializing in European credit at Accenture Plc. “Although the concept of installment payments is over a century old, the real-time delivery of BNPL to any card is new and convenient for users. Banks have the option of placing their unique brand on the offer.
This growing competition is adding pressure on buy-it-now and pay-later providers, which allow customers to split online purchases through their own apps or an additional button on retailers’ checkout pages. After several years of rapid growth, rising borrowing costs risk eroding their margins, just as soaring inflation is making credit more tempting and dangerous for many customers in Europe and the United States.
And investors, who saw Klarna as more valuable than some European banks last year, are rethinking their enthusiasm. Klarna’s latest fundraising in July slashed its valuation from $45.6 billion to $6.7 billion, while in the US, Affirm’s market capitalization has fallen more than 70% this year to $8.4 billion.
Traditional credit providers tend to have more funding and long-standing relationships with millions of customers, giving them a head start in challenging newcomers. They also have experience of the kind of regulatory crackdown looming for BNPL in the UK and elsewhere, with big companies pushing for tougher rules in the future, much to the chagrin of some startups.
There are lucrative deals at stake: Barclays, for example, made £541m, or around 16% of its UK revenue, from its consumer lending arm Barclaycard UK in the first half of the year. Granted, it’s smaller than its business lending or mortgage operations, but it would be painful to lose that clientele.
BNPL transactions reached around $147 billion in 2021, almost doubling in a year to represent around 2.7% of global business transactions, according to GlobalData. Data companies estimate this could reach around 7.1% of global trade by 2026. With more and more suppliers large and small entering the market, growth is expected to continue “especially in a macroeconomic environment with inflationary pressures where consumers need to look at alternative sources of credit to cover living expenses,” said Jeff Tijssen, partner at Bain & Co.
Bet on it
NatWest said in March it would allow customers to spread payments over four installments, interest-free if payments are made on time, like many BNPL startups. It was followed by HSBC and Virgin Money. Barclays, which has offered credit to checkouts for years, partnered with Amazon.com Inc. late last year to offer an installment option with the online marketplace.
Away from established banks, fintechs Monzo and Revolut both have products in this space while Apple announced in June that it would offer payments in four installments in its digital wallet, in partnership with Goldman Sachs Group Inc.
Payments giant PayPal Holdings Inc., which launched “Pay in 4” in August 2020, is also offering to spread the cost at 0% interest on purchases over £99. Around 22 million consumers have now used the service worldwide.
BNPL is the fastest growing online payment method in many economies, helped by the shift from the pandemic era to internet shopping and new generations of tech-savvy customers, according to Patricia Partelow, chief executive of BNPL. EY’s financial services advisory business. On Tiktok and Instagram, influencers share referral codes and show their purchases purchased entirely with BNPL credit.
“The growing popularity of BNPL also creates another risk for banks: losing access to millennial and Gen Z consumers attracted to this alternative form of financing,” Partelow wrote in an online post.
Still, as rates continue to rise, big lenders and new venture-backed companies will be tested and stressed, analysts say. The latest tumble in fintech valuations means banks are also eyeing acquisitions to expand into this space, according to Mike Abbott, global head of banking at Accenture. “This could be an opportunity for liability-heavy banks to improve their long-term return on equity, balance their loan portfolios and reduce their reliance on (often real estate-heavy) commercial loans,” he said. -he declares.
Fintech and payments companies globally continue to face reality, with stock prices and private equity valuations rebasing lower, accelerated by a race to the bottom for margins in a highly competitive space. As the need to cut costs and slowing investment temper expectations, the relative performance and valuation impact of different business models are increasingly stark, said BIoomberg banking analyst Jonathan Tyce.
Regulators, like banks, are catching up. Under new rules planned in the UK, lenders would have to check that loans are affordable to consumers and ensure that adverts are not misleading. Providers will also need approval from the Financial Conduct Authority, although regulation is unlikely before mid-2023.
Banks are used to the regulatory scrutiny new providers face for the first time. “We made it part of our lending criteria,” NatWest CEO Alison Rose said while speaking about BNPL in July. “We treat it almost like it’s a regulated product because I think it’s about making sure it’s a responsible loan.”
But that long track record with borrowers can also be seen as a downside, if banks use those relationships to encourage unaffordable borrowing, said Stella Creasy, a Labor MP who has campaigned against payday lenders such as Wonga, who s collapsed in 2018 after stricter regulations were put in place. introduced.
“At the moment it feels like what they’re doing is getting people to overdraw their expenses without calling it an overdraft, without letting them know what the risks are of taking that form of credit, what the consequences might be,” she said. said. Bloomberg News
Picture credits: Bloomberg