How Banks Should Use Buy Now Pay Later To Increase Their Customer Base

The Buy Now Pay Later (BNPL) phenomenon is gaining momentum around the world. BNPL services give consumers who do not have access to credit the ability to purchase goods and services with no deposit and to pay for goods and services over time. However, while banks, consumer credit providers and alternative credit providers will benefit from BNPL services, they also introduce challenges for financial regulators, existing providers in related markets and banks themselves.

Banks need to make sure that they are ready for a new type of competition. Larger retail banks seem to have added BNPL business to their portfolio already. Smaller banks will be forced to enter the market, either by acquiring a BNPL provider or rolling up the sleeves internally. In any case, it’s time that banks get rid of their prejudices and get on board with this consumer-friendly innovation that will ultimately benefit them by providing an influx of new customers, at least in the long run.

For a complete understanding of buy now pay later, we should first look at the traditional financing models that banks and fintechs use to lend credits. These financing technique is known as point-of-sale or POS. Let’s take a look on POS below.

 

How POS (Point-of-sale) Financing services work:

Traditional POS financing is a model that has been around for decades. Most consumers are familiar with its most basic form: pay now, pay later. With POS financing, a customer signs up for credit to buy a product, typically for a portion of its full price. Some POS financing programs require no down payment. Once the customer has made all payments, they become the owner of the goods.

POS financing works by financing the full price of the product, not a portion of the price. This means the customer pays the full purchase price of the item, plus interest. While POS financing has been popular for decades, it has faced some challenges. The payment model doesn't cater to customers who can't afford to pay the full purchase price upfront — these shoppers are often low-income or first-time-buyer customers. POS financing also requires shoppers to make large payments right away, which can be difficult for them.

“The banking “industry” is changing rapidly – almost on a daily basis. However, those changes are not affecting people as much as we may think, particularly the underserved and unbanked.”

-Steven Rosamilia, CEO at IMEX USA

How BNPL helps customers:

BNPL, or "buy now, pay later," payments enables customers to pay for their purchases over time, interest-free. BNPL payments don't appear on a customer's credit profile, so it doesn't affect their credit score. Here are some of the major points where BNPL helps customers:
  • BNPL payments give customers the ability to buy now and pay later without accruing interest. BNPL payments are typically not fixed and fluctuate based on a customer's ability to pay over time.
  • BNPL payments often appear in the form of layaway, credit extensions or installment loans.
  • BNPL payments may attract customers who want to own products but don't have the money upfront.
  • BNPL payments also work well for customers who want to spread out payments over time.


How BNPL is different than other POS lending services:

BNPL is an alternative payment technique offered by the payment service provider to businesses. Payment service providers use credit lines provided by banks and credit card companies to offer installment loans to customers.

Unlike conventional POS financing, BNPL focuses on consumers' ability to purchase a product rather than their ability to repay their loan. This is achieved by classifying consumers into different groups based on their creditworthiness and offering consumers an installment loan with payment periods that vary based on their creditworthiness. As a result, payment service providers use BNPL as a risk-based financing technique.

The payment service provider considers consumers' creditworthiness by classifying them into different consumer groups, such as "prime" consumers, "sub-prime" consumers, and "near-prime" consumers. These consumer groups are similar to credit profiles used by conventional credit card companies. With BNPL, businesses can request a payment profile classification from their business service provider.

The payment profile classification determines the installment loan payment schedule that the consumer receives. Businesses can request a payment profile classification from their business service provider. The payment profile classification determines the installment loan payment schedule that the consumer receives.

For checking your credit-worthiness before lending you BNPL, service providers may check consumer’s payment history, income, job stability, and other major factors. The financial service provider then use these factors to determine the installment loan payment schedule that the consumer receives.


What features BNPL brings to the table for Merchants:

Buy Now Pay Later is a new way to process payments. It's for young adults with shaky credit. The option lets merchants accept credit or debit cards but defer the payments.
It lets merchants offer customers a low payment schedule, typically 6 to 24 months. But it's different than payment plans. With BNPL, there's no interest, no hidden fees, and no penalties for not paying all at once.

BNPL works with all credit cards, not just Visa or MasterCard, and payments are processed securely through Authorized pages. BNPL increases conversion and sales by 20% for merchants while boosting average order value by 60%.

For customers, BNPL gives them access to the credit they otherwise wouldn't have. And for merchants, BNPL means more conversions, more sales and more repeat customers. BNPL is offered by a handful of digital storefronts, including Best Buy, Kohl's, and Walmart. But it's a new way of doing business that allows both parties to benefit from the deal (compared to 2.5 percent for a credit card transaction).


Why should Financial Institutions accept BNPL:

Amazon's Buy Now Pay Later (BNPL) program is both a blessing and a curse for retailers — a blessing as it offers them a way to boost sales by attracting shoppers who are price sensitive, and a curse because it threatens to erode bank's main business.

Amazon's BNPL program has only been around for two years, but it has already become a crucial part of the site's business model. The program gives people the option to buy products on Amazon with deferred payment terms. Customers purchase the product, but they aren't charged to agree to a 90-day payment plan until later.

While that's far less than the average credit card payment period — 25% of Americans carry credit card debt — BNPL has become popular enough with Amazon shoppers that it has shrunk Amazon's average purchase amount by $7.77, according to one report. That's a significant hit.

Amazon's BNPL program may be taking Amazon's main business, online sales, down a notch, but the banks that have issued BNPL cards aren't worried.

That's because BNPL cards, like credit cards, are financing. And financing today looks different than financing did even five years ago. Many consumers, especially Gen Z, prefer to buy with credit and postpone payments.

This shift in consumer preferences has major implications for banks. Banks issued financing to safe, creditworthy customers who wanted to buy now and pay later when credit cards were first introduced. But bank lending practices have changed over the years, and today many consumers use credit cards to finance products they might otherwise buy with cash.


How can Banks integrate BNPL in their lending services

BNPL is a fast-growing segment of the lending market. In 2015, BNPL made up 15.2% of all consumer credit originations and grew to $12.1 billion, according to the Federal Reserve Bank of New York.

BNPL's share grew from 8.4% in 2014 to 14.7% in 2015, according to Experian. A BNPL strategy allows banks to ride the wave of increased consumer debt by managing their balance sheet more aggressively. This helps stabilize revenues and boosts the profitability of loans as banks can charge higher interest rates.

While BNPL loans often come with hefty price tags, lenders can minimize their losses by structuring BNPL loans as an asset purchase rather than a loan sale. First, banks have to make sure they can fund the loans, either with their balance sheet or with funding from a non-bank lender. Second, banks have to decide whether the loan will be purchased directly or indirectly.

Cross River Bank is currently riding the BNPL trend with this model by providing Affirm with funding capacity. The model is safe as BNPL firms often purchase those loans after origination, but it also caps the potential gains banks can earn as the fee is often a small percentage of the total origination.

How can banks initiate marketing their buy now pay later services?

First, banks need to be agile and go after merchants that already have relationships with customers. Fintechs, on the other hand, must convince merchants that their service, regardless of its costs, is worth paying.

There are obviously some similarities. Both must win over merchants. But they also have different advantages. Fintechs don't have existing relationships or established customer bases, so they must build both from scratch.

Fintechs, however, have an advantage over banks in that they have the technology. In addition, fintechs can integrate their solutions into existing e-commerce systems, giving merchants an out-of-the-box, easy-to-deploy solution. This, in turn, makes fintech more attractive to merchants.

Fintechs can also target specific markets. For example, some banks sell online merchant accounts, but their service is often limited to larger merchants with more established distribution networks. Fintechs, on the other hand, can target smaller merchants, giving them an approach that's better suited to the needs of smaller businesses. Fintechs can also target specific niches. A fintech that targets small businesses, for example, could focus on those that sell high-priced goods online.

Fintechs don't have to build their distribution networks, either. Instead, they can use existing online channels like Amazon, eBay and Alibaba. Of course, fintechs can also sell directly to merchants, but this approach requires additional sales and marketing efforts.

Fintechs can also build their distribution networks. They can use a direct-to-consumer model, selling directly to their customers. This approach is best suited for fintech that is sells online merchant accounts and works for fintech that targets specific markets.


The Takeaway

BNPL programs have a critical role in financing trade and industry and financing small and medium-sized enterprises (SMEs). For this reason, BNPL programs should be an integral part of banks’ lending portfolios. Banks should optimize the utilization of BNPL programs.

At the same time, the regulatory framework for BNPL programs needs to be revised. The business models of BNPL programs should be standardized and standardized products should be available. At the same time, the regulatory framework for BNPL programs needs to be revised.


FAQs

What is buy now pay later?

Buy now pay later, as the name suggest, is an option Fintechs give you to purchase a product and pay for it after a certain amount of time. It works like a credit card payment, but it doesn’t charge you interest.

Does buy now pay later affect credit score?

No. Buy now pay later does not affect your credit score as long as you pay your dues timely. It is constructed in a way that you won’t have to worry about your credit score. However, banks may see your credit score before giving you BNPL service.

Why was I not eligible for buy now pay later?

Financial services or banks check your credit-worthiness before lending you the services of buy now pay later. They may check your payment history, income, job stability, etc. So before applying for BNPL, make sure you have a strong credit-worthiness.

What are the alternatives to buy now pay later?

You can use your credit card the same way as buy now pay later, but your interest-free days would only last till they bill you. You can also opt for interest free deals on purchases from e-commerce store.

Spotlight

National Funding

National Funding serves the small business community. Since 1999, over 35,000 customers have come to us for their working capital and equipment financing needs. We are one of the country's largest private providers of small business loans, having funded more than $2 billion to help small businesses grow. Our personal approach helps strengthen small business owners and we pride ourselves on being a resource they can trust. We are believers in small business owners.

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Article | September 14, 2023

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Bendigo and Adelaide Bank Picks nCino to Enhance Business Banking

nCino, Inc. | September 22, 2023

nCino, Inc. officially revealed that Bendigo and Adelaide Bank, a prominent Australian financial institution, has chosen nCino as its partner to streamline and elevate business banking operations. Adam Rowse, Chief Customer Success Officer for Business Bank and Agribusiness at Bendigo and Adelaide Bank, stated, We are pleased to partner with nCino as we step up our efforts to simplify our business. Our goal is to deliver our customers and staff with best-in-class user experience and to streamline our operations so that we can move at pace while delivering sustainable growth. [Source – Globe Newswire] Integrating nCino into Bendigo and Adelaide Bank's operations will harness the power of intelligent automation and process optimization, resulting in faster decision-making and allowing bankers to allocate more time to nurturing customer relationships. Mark Bernhardi, Managing Director of Australia and New Zealand at nCino expressed enthusiasm about the partnership with Bendigo and Adelaide Bank. He emphasized nCino's role as a preferred partner for forward-thinking banks worldwide, highlighting their established success in aiding banks to scale efficiently, enhance customer experiences, and drive rapid innovation. This strategic move aligns with the bank's comprehensive objective of simplifying its operational processes, optimizing customer as well as employee experiences, and accelerating its growth trajectory. Mark Bernhardi also expressed excitement about collaborating with the Bendigo and Adelaide Bank team as they progress in their transformation journey to streamline operations and foster a seamless experience for customers and staff. About Bendigo and Adelaide Bank Bendigo and Adelaide Bank is one of Australia's prominent financial institutions, with a dedicated workforce of over 7,000 professionals committed to serving a diverse customer base exceeding 2 million. The bank's vision is to secure its position as the preferred banking partner in Australia, actively contributing to the well-being of both its customers and the communities it serves. About nCino nCino leads the global cloud banking industry with its singular software-as-a-service platform. This platform empowers financial institutions to serve various customer segments, modernize their operations, streamline client onboarding, optimize loan processes, and expedite account openings. nCino's innovative approach, strong reputation, and swift operations have fostered partnerships with over 1,850 financial service providers worldwide.

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Digital Banking

Bankjoy Partners with Panacea Financial for Digital Banking Services

Bankjoy | September 13, 2023

Bankjoy, a prominent provider of digital banking services, has officially announced its collaboration with Panacea Financial, a specialized digital financial services firm tailored to medical professionals' banking requirements. With this collaboration, Panacea Financial will enhance the capabilities of its growing clientele, which includes dentists, physicians, and veterinarians, by integrating Bankjoy's advanced digital banking solutions. Tyler Stafford, CFA, CEO and Co-Founder of Panacea Financial, expressed that physicians, whether during their education, training, or active practice, contend with unique financial challenges. The core mission of Panacea Financial is to alleviate the financial stress experienced by doctors, dentists, and veterinarians while managing their finances, and their partnership with Bankjoy is a pivotal component in achieving this goal. Bankjoy's digital platform will enable Panacea's clients to easily manage their personal and practice finances anytime, anywhere. This partnership offers tailored financial support throughout their careers, from education to professional practice. Bankjoy's integration with Panacea's core system via Fiserv Communicator's open, user-friendly interface and ability to integrate with various banking platforms make it an excellent fit for neobanks like Panacea. Michael Duncan, CEO of Bankjoy, highlighted the robust growth in the neobank sector, with transactions expected to hit $4.74 trillion in 2023 and a projected customer base of nearly 377 million by 2027. Panacea Financial is focused on a critical market sector, serving the unique financial needs of healthcare professionals. Bankjoy is proud to partner with them, offering digital banking technology to empower clients to manage their finances and focus on their vital patient care responsibilities. Panacea operates on a national scale as a digital neobank, offering specialized banking services tailored to the distinct requirements of healthcare practitioners. It functions as a subsidiary of Primis, a publicly traded financial institution chartered by the state and affiliated with the FDIC, ranking among the largest banks in Virginia. About Bankjoy Bankjoy, headquartered in Detroit, is a FinTech firm that specializes in providing state-of-the-art banking technology, encompassing mobile banking, online banking, and a banking API, catering to financial institutions of varying sizes, from central banks to credit unions. The company prioritizes crafting aesthetically pleasing products with advanced functionalities, intuitive navigation, a contemporary aesthetic, and world-class user experiences, all meticulously designed through extensive user feedback and interaction. About Panacea Financial Panacea Financial, a subsidiary of Primis Financial Corp., operates as a comprehensive financial services firm serving clients in every U.S. state, including Washington, D.C. Panacea specializes in delivering an extensive range of banking solutions designed to cater exclusively to the unique financial needs of medical professionals, an initiative conceived and developed by individuals with medical expertise themselves.

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Payments

Oracle’s Banking Cloud to Redefine Real-Time Banking Transactions

Oracle | September 25, 2023

Oracle enhances banking cloud services for real-time cash management and transactions. New services optimize working capital and the customer experience. Oracle's comprehensive cloud suite offers ready-to-deploy APIs for agile banking. Oracle has broadened its Oracle Banking Cloud Services portfolio to empower banks in swiftly launching comprehensive transaction banking solutions. These encompass cash management, liquidity management, and virtual account management. Alongside Oracle's real-time payments processing, large-scale account operations, and APIs, these new services aim to enhance banks' visibility and forecasting capabilities, enabling customers to leverage their cash more effectively. In addition, Oracle has introduced enhancements to its Oracle Banking Accounts Cloud Service and Oracle Banking Enterprise Limits and Collateral Management Cloud Service. Sonny Singh, Executive Vice President and General Manager of Oracle Financial Services, reportedly emphasized the importance of delivering enhanced customer experiences, stating, Delivering enriched customer and banker experiences that provide immediate and tangible business value will be the growth lifeline for banks in the near term. [Source – Cision PR Newswire] The new solutions are designed to be seamlessly integrated into corporate enterprise resources management systems, facilitating real-time payments, settlements, and cash cycle optimization. The improvements in limits and collateral management streamline credit facility lifecycles, allowing banks to onboard corporate customers in minutes rather than months. Oracle Banking Accounts Cloud Service has expanded its support to include retail accounts, term deposits, nostro management, and account servicing. Together with the API Cloud Service, banks can swiftly tailor and deploy accounts across various digital channels. The new and enhanced Oracle Banking Cloud Services include: Oracle Banking Liquidity Management Cloud Service: Offers higher-yield investment opportunities, pooling, sweeping, and interest optimization for corporations to manage working capital efficiently. Oracle Banking Virtual Account Management Cloud Service: Provides corporations with capital clarity and effective management of complex global account structures. Oracle Banking Cash Management Cloud Service: Empowers corporate customers with cash flow forecasting, efficient collections and receivables management, and automated reconciliation. Oracle Banking Enterprise Limits and Collateral Management Cloud Service: Digitizes and simplifies the credit lifecycle, optimizing credit decisions and accelerating origination and servicing while mitigating risks. Oracle Banking Accounts Cloud Service: Streamlines account management and operations for both corporate and retail accounts. Oracle Banking Payments Cloud Service: Facilitates real-time payment processing and offers a one-stop solution for various payment types. Oracle Digital Banking Experience Cloud Service: Enhances self-service experiences for corporations, providing actionable insights and automation. Oracle Banking APIs Cloud Service: Offers a range of ready-to-deploy banking APIs to accelerate innovation and improve customer experiences. These services are part of the Oracle Banking Cloud Services suite, built on a microservices’ architecture, providing flexibility, scalability, security, and compliance with Oracle Cloud Infrastructure.

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Digital Banking

Bendigo and Adelaide Bank Picks nCino to Enhance Business Banking

nCino, Inc. | September 22, 2023

nCino, Inc. officially revealed that Bendigo and Adelaide Bank, a prominent Australian financial institution, has chosen nCino as its partner to streamline and elevate business banking operations. Adam Rowse, Chief Customer Success Officer for Business Bank and Agribusiness at Bendigo and Adelaide Bank, stated, We are pleased to partner with nCino as we step up our efforts to simplify our business. Our goal is to deliver our customers and staff with best-in-class user experience and to streamline our operations so that we can move at pace while delivering sustainable growth. [Source – Globe Newswire] Integrating nCino into Bendigo and Adelaide Bank's operations will harness the power of intelligent automation and process optimization, resulting in faster decision-making and allowing bankers to allocate more time to nurturing customer relationships. Mark Bernhardi, Managing Director of Australia and New Zealand at nCino expressed enthusiasm about the partnership with Bendigo and Adelaide Bank. He emphasized nCino's role as a preferred partner for forward-thinking banks worldwide, highlighting their established success in aiding banks to scale efficiently, enhance customer experiences, and drive rapid innovation. This strategic move aligns with the bank's comprehensive objective of simplifying its operational processes, optimizing customer as well as employee experiences, and accelerating its growth trajectory. Mark Bernhardi also expressed excitement about collaborating with the Bendigo and Adelaide Bank team as they progress in their transformation journey to streamline operations and foster a seamless experience for customers and staff. About Bendigo and Adelaide Bank Bendigo and Adelaide Bank is one of Australia's prominent financial institutions, with a dedicated workforce of over 7,000 professionals committed to serving a diverse customer base exceeding 2 million. The bank's vision is to secure its position as the preferred banking partner in Australia, actively contributing to the well-being of both its customers and the communities it serves. About nCino nCino leads the global cloud banking industry with its singular software-as-a-service platform. This platform empowers financial institutions to serve various customer segments, modernize their operations, streamline client onboarding, optimize loan processes, and expedite account openings. nCino's innovative approach, strong reputation, and swift operations have fostered partnerships with over 1,850 financial service providers worldwide.

Read More

Digital Banking

Bankjoy Partners with Panacea Financial for Digital Banking Services

Bankjoy | September 13, 2023

Bankjoy, a prominent provider of digital banking services, has officially announced its collaboration with Panacea Financial, a specialized digital financial services firm tailored to medical professionals' banking requirements. With this collaboration, Panacea Financial will enhance the capabilities of its growing clientele, which includes dentists, physicians, and veterinarians, by integrating Bankjoy's advanced digital banking solutions. Tyler Stafford, CFA, CEO and Co-Founder of Panacea Financial, expressed that physicians, whether during their education, training, or active practice, contend with unique financial challenges. The core mission of Panacea Financial is to alleviate the financial stress experienced by doctors, dentists, and veterinarians while managing their finances, and their partnership with Bankjoy is a pivotal component in achieving this goal. Bankjoy's digital platform will enable Panacea's clients to easily manage their personal and practice finances anytime, anywhere. This partnership offers tailored financial support throughout their careers, from education to professional practice. Bankjoy's integration with Panacea's core system via Fiserv Communicator's open, user-friendly interface and ability to integrate with various banking platforms make it an excellent fit for neobanks like Panacea. Michael Duncan, CEO of Bankjoy, highlighted the robust growth in the neobank sector, with transactions expected to hit $4.74 trillion in 2023 and a projected customer base of nearly 377 million by 2027. Panacea Financial is focused on a critical market sector, serving the unique financial needs of healthcare professionals. Bankjoy is proud to partner with them, offering digital banking technology to empower clients to manage their finances and focus on their vital patient care responsibilities. Panacea operates on a national scale as a digital neobank, offering specialized banking services tailored to the distinct requirements of healthcare practitioners. It functions as a subsidiary of Primis, a publicly traded financial institution chartered by the state and affiliated with the FDIC, ranking among the largest banks in Virginia. About Bankjoy Bankjoy, headquartered in Detroit, is a FinTech firm that specializes in providing state-of-the-art banking technology, encompassing mobile banking, online banking, and a banking API, catering to financial institutions of varying sizes, from central banks to credit unions. The company prioritizes crafting aesthetically pleasing products with advanced functionalities, intuitive navigation, a contemporary aesthetic, and world-class user experiences, all meticulously designed through extensive user feedback and interaction. About Panacea Financial Panacea Financial, a subsidiary of Primis Financial Corp., operates as a comprehensive financial services firm serving clients in every U.S. state, including Washington, D.C. Panacea specializes in delivering an extensive range of banking solutions designed to cater exclusively to the unique financial needs of medical professionals, an initiative conceived and developed by individuals with medical expertise themselves.

Read More

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