Embedded Finance Tracker® Series Report

Build Now, Not Later: How Banks Can Seize the BNPL Opportunity

February 2024

Banks are struggling to connect with many consumers who prefer to manage their finances via digital-native FinTechs and other competitors. By deploying popular buy now, pay later services, banks could reclaim this customer base and gain a competitive edge.

PYMNTS
01

BNPL financing has become widely popular in recent years as a means of defraying the increasing costs of many goods, especially among younger consumers with less spending power but greater digital savvy.

02

Surging consumer demand has spurred many banks and FIs to offer BNPL services of their own as a way of attracting new customers. Many institutions are tapping third parties to help them achieve their BNPL ambitions.

03

FinTechs may have been quicker on the BNPL draw than banks, but traditional FIs are catching up fast. Their ability to offer comprehensive and trusted financial services could give them the edge in the long run.

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    Buy now, pay later (BNPL) services are growing increasingly popular among consumers in the United States, with 28% of shoppers saying they used the payment method for transactions at least once within the past 90 days, according to a recent J.D. Power report. These financing options — which allow customers to pay for goods and services in interest-free (or low-interest) installments — are typically fast and easy to use at the point of checkout. Moreover, once a customer has enrolled with a particular BNPL provider, payments can be automatically processed with just a few clicks, providing a largely hands-off, hassle-free experience.

    This kind of seamless transaction is what consumers demand — even expect — from their financial service providers. It represents a significant factor in why banks have been surrendering customers to their FinTech competitors. For financial institutions (FIs), introducing BNPL options could be crucial to winning these customers back by fulfilling their digital needs.

    Customers Crave BNPL Options

    BNPL financing has become widely popular in recent years as a means of defraying the increasing costs of many goods, especially among younger consumers with less spending power but greater digital savvy.

    $9.2B

    was spent on BNPL transactions in November 2023 alone.

    BNPL use surged during the holidays.

    Consumers spent almost $17 billion on online transactions via BNPL between Nov. 1 and Dec. 31 of last year, a 14% increase over the same period in 2022. November in particular showed a record $9.2 billion in BNPL spending, and Cyber Monday alone raked in $940 million, a rise of nearly 43% year over year. Experts attribute this surge to economic uncertainty, which drove retailers to embrace flexible payment options to entice shoppers. The increasing adoption of BNPL also corresponds with the expansion of alternative payment methods such as digital wallets.

    One in four BNPL users want providers to lower their fees.

    Despite their growing usage of BNPL products, users would like to see some improvements made to the system. A recent PYMNTS Intelligence study found that more than one-quarter of BNPL users expressed a desire for lower fees and an easier application process. Many are interested in rewards programs, with roughly 38% believing that the availability of such a program would enhance their satisfaction with BNPL providers. Even without these enhancements, 43% of existing BNPL users expressed their intent to continue utilizing the method, while 15% of individuals who haven’t yet availed themselves of BNPL services are considering doing so.

    Banks Are Testing BNPL Waters

    Surging consumer demand has spurred many banks and FIs to offer BNPL services of their own as a way of attracting new customers. Many institutions are tapping third parties to help them achieve their BNPL ambitions.

    High demand

    for BNPL has driven many banks to begin exploring offering their own BNPL services to consumers.

    U.S. Bank recently announced the launch of an in-house BNPL service.

    The system, known as U.S. Bank Avvance, resembles many other BNPL services in that it offers no- and low-interest point-of-sale (POS) financing to consumers, allowing them to check their loan options without involving a formal credit inquiry. Repayment terms range from three to 60 months. This system is notable for being among the first of its kind offered by a national bank chain, with U.S. Bank leaning on its existing relationships with merchants to adopt this system over more entrenched BNPL providers like Klarna or Afterpay.

    Marqeta and Credi2 have teamed up to provide BNPL services for banks.

    The new system, which supports the European market, combines Credi2’s embedded lending platform with Marqeta’s card-issuing offering and purports to let European banks go to market more quickly with an installment solution for their debit and credit card cardholders. These cardholders will be able to make installment payments both online and in-store. Marqeta noted in a press release that one-third of the consumers it surveyed prefer BNPL over credit cards, potentially indicating a large consumer appetite for bank-backed BNPL options.

    Banks’ Inherent Advantages in the BNPL Space

    FinTechs may have been quicker on the BNPL draw than banks, but traditional FIs are catching up fast. Their ability to offer comprehensive and trusted financial services could give them the edge in the long run.

    43%

    of Generation Z consumers said brick-and-mortar banks give them peace of mind.

    Generation Z consumers trust banks more than FinTechs.

    A recent survey found that 43% of Generation Z consumers said brick-and-mortar banks provided peace of mind that digital-native FinTechs could not, a vital consideration as this cohort becomes a more significant segment of the overall consumer population. Another 73% said customer experience helps them determine their favorite brands, making this aspect of the business relationship a key priority for banks seeking to enter the BNPL space. While 72% of Gen Z consumers currently use neobank apps as their primary budgeting tools, their confidence in traditional FIs suggests that banks could easily penetrate this market.

    Americans trust banks to detect and prevent digital fraud.

    Consumers rightfully fear digital fraud and other forms of cybercrime. According to a recent survey, 27% of adults acknowledge falling victim to digital scams at some point in their lives. When it comes to offering protection against these criminal activities, banks enjoy a high level of consumer confidence, with 55% of consumers ranking them among their top-three most trusted institutions for scam prevention. Another 90% of U.S. adults expressed confidence in banks’ ability to detect and prevent financial scams. This level of trust could encourage consumers to prefer BNPL services from established banks over those offered by FinTechs and alternative banks.

    Why Banks Are Making Pushes Into BNPL

    Banks stand out as uniquely suited to offer BNPL options to consumers due to their inherent strengths and capabilities. They possess a robust infrastructure and extensive experience and expertise in managing financial transactions. Their established systems for handling payments, credit assessments and risk management make them well-equipped to integrate BNPL services into their existing operations. This positions them to provide a smooth and secure experience for consumers, minimizing the likelihood of operational glitches and enhancing the overall reliability of BNPL transactions.

    In addition, banks have access to vast amounts of customer data, including transaction histories, credit scores and spending patterns. This abundance of information enables them to conduct thorough risk assessments when determining a customer’s eligibility for a BNPL plan. It also serves to protect them from fraud and other harmful scams. By leveraging sophisticated algorithms and predictive analytics, banks can tailor BNPL offerings to individual consumers, customizing terms and conditions based on their financial profiles and identifying suspicious spending patterns that could be indicative of fraud. Leveraging these strengths and capabilities can enable banks not only to meet the growing demand for flexible payment solutions but also to ensure the responsible and sustainable use of BNPL services by consumers.

    About

    Galileo is a leading financial technology company whose platform, open API technology and proven expertise enable FinTechs and emerging and established brands to create differentiated financial solutions that expand the financial frontier. Galileo removes the complexity from payments and financial services innovation by providing flexible, open API building blocks and a secure, scalable, future-proof platform. Trusted by digital banking heavyweights, early stage innovators and enterprise clients alike, Galileo supports issuing physical and virtual payment cards, mobile push provisioning and more, across industries and geographies. Headquartered in Salt Lake City, Galileo has offices in Mexico City, New York City, San Francisco and Seattle. Learn more at galileo-ft.com.

    PYMNTS INTELLIGENCE

    PYMNTS Intelligence is a leading global data and analytics platform that uses proprietary data and methods to provide actionable insights on what’s now and what’s next in payments, commerce and the digital economy. Its team of data scientists include leading economists, econometricians, survey experts, financial analysts and marketing scientists with deep experience in the application of data to the issues that define the future of the digital transformation of the global economy. This multilingual team has conducted original data collection and analysis in more than three dozen global markets for some of the world’s leading publicly traded and privately held firms.

    The PYMNTS Intelligence team that produced this Tracker:
    Managing Director: Aitor Ortiz
    Senior Writer: Andrew Rathkopf
    Content Editor: Joe Ehrbar


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