People shopping at the Glendale Galleria shopping mall in California on Dec. 26, 2023. Source: Mario Tama via Getty Images News.

Banks are poised to challenge pure-play providers in the growing buy-now, pay-later market, helped by favorable regulation trends and natural advantages such as large balance sheets from which they can lend.

Buy-now, pay-later (BNPL), which lets consumers pay for purchases in a series of interest-free installments, boomed during the COVID-19 pandemic as online shopping surged amid lockdowns, and the market has been expanding ever since.

New rules could force BNPL firms, which have targeted younger, riskier customers, to run more rigorous credit checks and would likely cut into revenues and drive up compliance costs at pure-play firms such as US-based Affirm Holdings Inc. and Sweden's Klarna Holding AB.

Banks, on the other hand, would fare better as they are used to operating under strict requirements and have well-established compliance processes. Those that have entered the space include Barclays PLC, JPMorgan Chase & Co. and Deutsche Bank AG.

Banks' large balance sheets, wealth of data on customer creditworthiness and high level of trustworthiness mean they are set to play a prominent role in the space, according to McKayla Wooldridge, a fintech research analyst at S&P Global Market Intelligence 451 Research.

"Consumers trust their banks to provide financial services over any other type of provider," Wooldridge told S&P Global Market Intelligence.

451 Research survey results show consumers prefer banks' BNPL offerings over those of pure-play BNPL providers, and bank-branded BNPL products are the most preferred among merchants.

Regulation would put more pressure on pure-play BNPL companies, which, according to the Bank for International Settlements, have struggled to break even due to high operating costs and stiff competition.

Jurisdictions including the US, the UK, the EU, Canada, India and Singapore plan to impose new rules. Pure-play firms may have to run "hard" credit checks, which evaluate a customer's complete financial history and could affect their credit score, rather than the "soft" checks typically applied now that do not require a customer's credit history.

Australia's Treasury earlier in March released draft rules whereby BNPL providers would have to hold credit licenses, and conduct stricter customer checks, especially for larger sums. The UK has so far focused on ensuring contracts are understandable, and will require certification of BNPL firms.

Future growth

In only a few years, BNPL has become a mainstream payment method offered by more than 100 global providers. Product take-up remains strong and diversified across verticals, with steady year-over-year growth in consumer adoption, according to a sector report by 451 Research.

Initially, BNPL was mainly used by younger consumers, but now older generations are using it more, Wooldridge said, citing 451 Research findings from a US-based consumer survey.

There has been strong adoption from merchants, too: 3 in 4 US-headquartered merchants either currently offer BNPL, are in the discovery phase or are planning to adopt within the next 12 months, 451 Research found.

Growth is set to continue with the share of BNPL in overall global business-to-consumer e-commerce payment volume projected to rise to 6.5% in 2030 from 4.9% in 2022, according to 451 Research's Consumer Digital Payments Monitor. The compound annual growth rate of volume over that period is set to be 13.9%, ahead of digital wallets, cards or bank transfers.

Banks as providers

Banks are vital for the market as they provide the capital BNPL platforms need to operate, with the largest pure-play companies being funded by one or more banks. Affirm works with Celtic Bank Corp., Cross River Bank and Lead Bank; its domestic peer UpLift Inc. works with Celtic Bank Corp. and CBW Bank; and Klarna works with WebBank, 451 Research data shows.

Some banks have opted to enter the BNPL market with their own version of payment-in-installments schemes or branded products, typically offered through a white-label BNPL partner. First National Bank of Omaha and Citizens Financial Group Inc. in the US and major European banks including Barclays, HSBC Holdings PLC and Deutsche Bank have entered the market in the past few years.

Offering BNPL under their own brand can help banks attract and retain customers, especially from younger generations, and boost revenues by increasing cross-selling opportunities, Wooldridge said. Banks have an edge over pure-play providers as they can lend off their own balance sheets instead of borrowing like BNPL platforms. They can also offer better fees to merchants given they do not have the extra cost BNPL providers have, Wooldridge said.

Banks initially viewed BNPL as a rival product to their credit card businesses, but they are now using it as a complementary offering, the 451 Research analyst said. They are also more likely to invest in BNPL once stricter rules are in place as that will give investors and customers confidence, Matthew Purnell, a fintech and payments research analyst at Juniper Research, told Market Intelligence.

In 2023, HSBC partnered with Worldpay Inc. to extend its own "installment plan" service to customer shopping at all UK merchants working with Worldpay.

"We recognize [BNPL] is a potential growth area in the market," a spokesperson for the bank told Market Intelligence.

Barclays has teamed up with Amount Inc. for BNPL in the US, and in the UK, it has extended its ongoing cooperation with Amazon.com Inc. to enable customers to pay in installments for purchases of £100 or more.

Both HSBC and Barclays stress that their services are more secure than those of pure-play BNPL providers, as they are offered only to eligible credit card holders who undergo thorough checks. HSBC does not view its "installments" feature to be a BNPL offering like Klarna's as it is "fully regulated" and payment limits are set for customers, the HSBC spokesperson said.

In continental Europe, Deutsche Bank launched its own business-to-business BNPL offering in partnership with Austria-based BNPL provider Credi2, which provides real-time checks for nonpayment and fraud and includes the receivables arising from the respective sales in its own risk portfolio, the bank said.

Deutsche Bank's offering is more secure than most other BNPL offerings since businesses will be paid upfront for transactions by the bank and represents a viable alternative to fintech BNPL firms, Juniper Research's Purnell said.

BNPL post-regulation

The jury is still out on the ways new rules would change the BNPL market and whether more banks would get involved with their own offerings.

Some big banks in the US and the UK have already left, having experimented with BNPL for a couple of years amid the market's post-pandemic growth spurt. In late 2023, US bank Goldman Sachs Group Inc. sold platform GreenSky Inc., via which it offered BNPL installments since 2021, while UK-based NatWest Group PLC plans to close its BNPL offering in May 2024 to focus on "core lending products" such as credit cards, a NatWest spokesperson told Market Intelligence.

The only country that has implemented BNPL-specific regulations so far is Denmark, doing so in July 2023, but there is no information yet on whether this has changed how banks interact with BNPL, Purnell said. One can only speculate how regulation in the UK and US will play out, yet it is more likely to hit pure-play providers, he added.

"Klarna criticized the proposed regulation in the UK for being too strict, meaning that many of the conveniences offered by fintech BNPL players would be greatly impacted following implementation, especially in the case of granting financing for consumers, which would not normally occur in harder credit checks," Purnell said.

– Access a BNPL report and the latest Consumer Digital Payments Market Monitor from 451 Research (subscription required). 451 Research is a technology research group within S&P Global Market Intelligence. For more about 451 Research, please contact 451ClientServices@spglobal.com.