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

Talha Tamboli | October 7, 2021 | 62 views

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.

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Wolters Kluwer Compliance Solutions Hosts Digital Banking Assets Informational Webinar

Wolters Kluwer | July 14, 2022

Simon Moir, Vice President and Segment Leader, Banking Compliance, at Wolters Kluwer Compliance Solutions, will lead a panel of industry experts exploring key elements of effective digital lending programs in a complimentary, virtual event, “Trends, Best Practices, and Technology for eMortgages, HELOCs, and Other Digital Assets,” from 3 - 4 pm EDT Tuesday, August 9. Moir will serve as moderator in this panel discussion featuring Craig Focardi, Senior Analyst, Banking, for Celent, a leading research and advisory firm focused on technology for financial institutions globally; Rick Sharga, Executive Vice President, ATTOM, a leading provider of comprehensive real estate data for companies in the real estate, mortgage, insurance, finance and government markets; and James Milne, Product Manager, for Rocket Mortgage, an early adopter of digital asset transactions and the nation’s first lender to use eNotes in closing a Ginnie Mae-backed loan. Attendees will learn about emerging best practices and the benefits of originating digital Home Equity Lines of Credit (HELOCs)—including increased transparency of digital transactions, more accurate data extraction, and improved monetization opportunities—as opposed to paper- or PDF-based transactions. The session will look at lenders’ increasing focus on growing their home equity business in light of the recent drop-off in cash-out refinancing, using expert insights and customer use cases and proof points to illustrate these capabilities. “There is increasing recognition of the benefits that digital tools can bring to the mortgage lending space, as lenders leverage the concepts of digital HELOCs, eMortgages and OmniVault technology, which can help them secure and manage all of their eAssets on a single platform,” said Moir. “There is increasing recognition of the benefits that digital tools can bring to the mortgage lending space, as lenders leverage the concepts of digital HELOCs, eMortgages and OmniVault technology, which can help them secure and manage all of their eAssets on a single platform,” said Moir. “With mortgage refinancing down and homeowners enjoying high home equity gains, mortgage lenders are focusing increasingly on home equity lending. They are also viewing this as an opportunity to positively impact and further differentiate their customer experience via digital HELOCs and extend their digital asset creation to home equity. This session aims to show how eMortgage and digital lending technologies, specifically the eVault, gives institutions simple, consistent ways to originate and manage all digital real estate assets across their entire organization.” Wolters Kluwer Compliance Solutions is a market leader and trusted provider of risk management and regulatory compliance solutions and services to U.S. banks, credit unions, insurers and securities firms. The business, which sits within Wolters Kluwer’s Governance, Risk & Compliance (GRC) division, helps these financial institutions efficiently manage risk and regulatory compliance obligations, and gain the insights needed to focus on better serving their customers and growing their business. Wolters Kluwer’s GRC division provides an array of expert solutions to help financial institutions manage regulatory and risk obligations. Wolters Kluwer Compliance Solutions’ eOriginal™ suite of purpose-built, digital lending offerings helps lenders digitize their transactions and features electronic signatures, collateral authentication and an electronic vault. Wolters Kluwer Finance, Risk & Regulatory Reporting (FRR), meanwhile, is a global market leader in the provision of integrated regulatory compliance and reporting solutions. The division’s legal solutions businesses are Wolters Kluwer CT Corporation and Wolters Kluwer ELM Solutions. About Wolters Kluwer Governance, Risk & Compliance Governance, Risk & Compliance is a division of Wolters Kluwer, which provides legal and banking professionals with solutions to help ensure compliance with ever-changing regulatory and legal obligations, manage risk, increase efficiency, and produce better business outcomes. GRC offers a portfolio of technology-enabled expert services and solutions focused on legal entity compliance, legal operations management, banking product compliance, and banking regulatory compliance. Wolters Kluwer (AEX: WKL) is a global leader in professional information, software solutions, and services for the healthcare; tax and accounting; governance, risk and compliance; and legal and regulatory sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialized technology and services. Wolters Kluwer reported 2021 annual revenues of €4.8 billion. The group serves customers in over 180 countries, maintains operations in over 40 countries, and employs approximately 19,800 people worldwide. The company is headquartered in Alphen aan den Rijn, the Netherlands.

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PAYMENTS,BLOCKCHAIN

SGH to Acquire Stratus Technologies

SGH | June 30, 2022

SMART Global Holdings, Inc. (“SGH” or the “Company”) (Nasdaq: SGH) today announced that it has entered into a definitive agreement with affiliates of Siris Capital Group, LLC, to acquire Stratus Technologies (“Stratus”), a global leader in simplified, protected, and autonomous computing solutions in the data center and at the Edge. Under the terms of the agreement, SGH will pay $225 million in cash at closing and an earn-out payment of up to $50 million, based on the gross profit performance of the Stratus business during the first full 12 fiscal months of Stratus following the closing. Consistent with the Company’s existing lines of business, Stratus delivers differentiated technology solutions to specialty end markets. In particular, the addition of Stratus’ high-availability, fault-tolerant computing platforms, software, and services will expand the Company’s Intelligent Platform Solutions (“IPS”) business to better serve Stratus and IPS customers worldwide. This transaction builds upon our successful track record of M&A at SGH, The high-availability and fault-tolerant capabilities of Stratus will expand our IPS offerings in Edge, Core, and Cloud, and will enable us to more comprehensively address our combined customers’ needs. We look forward to welcoming the Stratus team to SGH.” Mark Adams, CEO of SGH. About Stratus For leaders digitally transforming their operations to drive predictable, peak performance with minimal risk, Stratus ensures the continuous availability of business-critical applications by delivering zero-touch Edge Computing platforms that are simple to deploy and maintain, protected from interruptions and threats, and autonomous. For 40 years, we have provided reliable and redundant zero-touch computing, enabling global Fortune 500 companies and small-to-medium sized businesses to securely and remotely turn data into actionable intelligence at the Edge, Cloud and Data Center – driving uptime and efficiency. About SGH At SGH, our companies are united by a drive to raise the bar, execute with discipline and focus on what’s next for the technologies that support and advance the world. Across computing, memory, and LED lighting solutions, we build long-term strategic partnerships with our customers. Backed by a proven leadership team, we operate with excellence around the globe while unlocking new avenues of growth for our business and industry. About Siris Siris is a leading private equity firm that invests primarily in mature technology and telecommunications companies with mission-critical products and services, facing industry changes or other significant transitions. Siris' development of proprietary research to identify opportunities and its extensive collaboration with its Executive Partners and Advisors are integral to its approach. Siris' Executive Partners and Advisors are experienced senior operating executives that actively participate in key aspects of the transaction lifecycle to help identify opportunities and drive strategic and operational value. Siris is based in New York, Silicon Valley and West Palm Beach, and has raised nearly $6 billion in cumulative capital commitments.

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CORE BANKING

ERI partners with Bottomline to extend financial messaging solutions to financial institutions

Bottomline | October 05, 2021

ERI, provider of the leading technology platform OLYMPIC Banking System digitising front-to-back financial services processes, and Bottomline (NASDAQ:EPAY), a leading provider of financial technology that makes business payments simple, smart and secure, today announced a strategic partnership to integrate Bottomline’s SaaS-based financial messaging solutions with ERI’s OLYMPIC Banking System software package. This strategic alliance is effective worldwide, making Bottomline’s offering available to OLYMPIC Banking System customers globally via the system’s various cloud and on-premises configurations. Bottomline is a recognised and trusted expert delivering end-to-end technology solutions. Its SaaS offering is a comprehensive portfolio of products for financial messaging, reconciliation, business flow integration, market data and other services related to the payments and securities business. OLYMPIC Banking System is a fully-integrated, front-to-back, parameter-driven digital platform supporting banks and financial institutions in streamlining, automating and digitising their core business activities across their clients’ entire lifecycle. Jean-Philippe Bersier, ERI’s Director of Business Development, says: “ERI has a long collaboration history with Bottomline, and a significant number of our clients use Bottomline solutions daily with great satisfaction. Signing this strategic partnership is a step further in our collaboration and we aim to extend and integrate our products into more cloud-based environments and SaaS (Software as a Service) models.” Roni Hougui, COO at Hyposwiss Bank, headquartered in Geneva, underlines the fact that the bank has used the Bottomline solutions for a long time: “The SaaS solution for reconciliation perfectly integrates with the OLYMPIC Banking System. Thanks to that link we have been able to significantly improve our operational efficiency. Our processes are fully optimised, benefiting from a robust and reliable integrated solution.” "Working collaboratively to achieve a common goal is key," confirms Daniel Bardini, Managing Director at Bottomline Technologies, Switzerland. "We are thrilled to offer OLYMPIC Banking System’s customers an easy, convenient way to access new financial networks and provide the very tools that banks need to automate, secure and manage their payments and securities business, and to help in simplifying reconciliations and data management processes." About ERI ERI is an international company specialising in the design, development, distribution and support of the integrated, real-time banking and wealth management software package: OLYMPIC Banking System®. Operating in many of the major financial centres, ERI is present in Geneva, Zurich, Lugano, London, Luxembourg, Singapore and Paris. ERI is focused on providing comprehensive, quality software with effective system implementation assistance and efficient ongoing maintenance and support for clients worldwide. More than 400 banks and financial institutions across 60 countries in Europe, the Middle East, Africa, the Americas and Asia have already chosen the OLYMPIC Banking System®.

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