Misguided Assumptions Need Not Stall Digital Innovation

With a user base rivaling social media, digital banking has transitioned from a burgeoning trend to a full-on boom. Yet in our recently published bank study Getting Ahead of the Digital Banking Curve, developed in partnership with Lendit, we found that legacy institutions have been slow to introduce leading-edge digital offerings, particularly popular point-of-sale installment plans, most commonly known as Buy Now, Pay Later (BNPL).

A payment option that allows consumers to pay for immediately receivable products in either a split-pay sequence or a series of installment loans, BNPL exploded in popularity during the pandemic when physically constrained consumers grew accustomed to completing transactions via swipe and tap. In 2021 BNPL usage more than doubled . And now having extended its reach to more mundane consumer purchases, like gas stations and grocery stores, and made inroads into B2B payments, BNPL is expected to grow even more in 2022. 

Our research reveals that 14% of major banks have adopted a BNPL option, and another 25% are set to launch one in the next 12 to 18 months. For enterprises with assets over $50 billion, a sizable 47% plan to roll out BNPL within 18 months. 

Understandably, the leap into BNPL comes with concerns. In our survey, when asked what internal constraint or conflict is prohibiting the launching of a BNPL or installment-credit product, financial institutions offered consistent responses: market maturity, collection infrastructure and regulations, the right technology and/or collaborator, the right user experience, resources/technology and IT bandwidth. 

Of particular concern is BNPL’s impending regulation. Since the beginning of the year, the Consumer Finance Protection Bureau (CFPB) has been taking a more active role in the BNPL space, with a focus on credit bureau reporting, underwriting and disclosures. Yet this is a good thing for banks: Not only is it more clear where the BNPL regulatory requirements will be focusing – it spotlights why banks are intrinsically better-positioned to meet them. 

BNPL is inherently a loan product. As such, it’s best-offered by an institution that is regulated and compliant. Banks are already required to do credit bureau reporting for consumer loans, including both on time and missed/late payments, as well as comply with strict underwriting and Gramm-Leach-Bliley data protections and data disclosures. 

In view of the CFPB review, traditional financial institutions should keep in mind that the combination of a fintech’s’ BNPL expertise and their own internal resources can ensure a balance of responsibility and accessibility. For instance, possessing up-to-the-minute knowledge of account holders’ purchases, banks have comprehensive data on potentially problematic spending habits. Any “red flags” could prompt traditional financial institutions to consult partnering fintechs and disperse point-of-sales literacy materials on prudent usage. Banks could also monitor direct deposits, setting maximums and approval processes for BNPL loans. If an account holder still defaults on a BNPL line of credit, the bank could “freeze” future usage. These measures would allay risk for all parties involved.

Though BNPL may not fit the customer profile or risk criteria for every bank, it is still  a winning choice for many financial institutions. When crafting rollouts, experts interviewed in our survey recommend collaborating with a fintech and pursuing a progress-over-perfection approach. BNPL thrives on immediacy, and WestCap’s Managing Director Kapil Mo warns that “those who want it will find  it, and they’ll find it with someone else.” If functionality and messaging is on target, current-day forays into BNPL will constitute a net gain. 

Ultimately, fintech and financial institution partnerships have a critical role to play in the brave new world of BNPL and banking on demand. Traditional banks cannot compete with inflexible, passe solutions. But, as explored in our report, advances in customer focus, processes and culture can be easily pursued in partnership with a fintech. Financial leaders would be wise to shed any last vestiges of insularity or reactivity, opening themselves up to fintech expertise on the digital transformations today’s consumers crave.