More U.K. banks are expected to move into the fast-growing buy-now, pay-later, or BNPL, sector as upcoming regulation is set to ease concerns about reputational risk.
BNPL, which gives customers the option to pay for goods and services using short-term, interest-free credit as long as they make full repayment on time, represents a relatively small slice of transaction value in the U.K. e-commerce market, but it is rapidly gaining momentum. It accounted for 5% of transaction values in 2020 and is growing at between 60% and 70% annually, according to management consulting firm Bain & Co. The service is embedded in digital payment and lending products used by 25% of e-commerce customers, it said.
The U.K. government said earlier this year that it plans to regulate the sector, amid concerns that consumers using BNPL could be racking up substantial debts with multiple companies and facing debt collectors in some cases. The Treasury will consider what kind of regulation is most appropriate following a consultation due to end in January 2022. BNPL falls outside much of the consumer credit protection regime, and banks have thus far been wary of entering the unregulated lending market with its associated reputational risks.
Interest from banks
In the U.K., Revolut Limited has said it will offer a service whereby customers can use a button on its app to convert their card to a BNPL service. Fellow digital lender Monzo Bank Ltd. has announced a similar service. Meanwhile, high-street bank Barclays PLC operates in the regulated BNPL market via a relationship with Amazon in Germany, and a similar operation will soon come to the U.K. But former CEO Jes Staley said in October that Barclays would not enter the unregulated BNPL market.
The kind of tie-up already seen at Barclays and Amazon is likely to become more frequent, according to analyst Fahed Kunwar, author of a report on BNPL for equity research firm Redburn.
Banks are well positioned to enter the space as they have a huge base of retail customers, according to Jeff Tijssen, a partner at Bain.
The service is well liked by consumers, who prefer it to credit cards and overdrafts, according to Bain. Its interest-free nature is a big draw, and users in the U.K. saved £103 million in credit card interest costs in 2020, Bain estimated.
Credit cards flatline
U.K. credit card customers have paid down debt during the pandemic, with balances outstanding dropping in every month between March 2020 and July 2021, data from industry body UK Finance shows.
"In e-commerce, the use of credit, and to some extent debit, cards has broadly flatlined, and the use of BNPL has increased," said Kunwar. There appears to have been a "broad transfer" from cards to BNPL, especially in the U.K. and the U.S., he said.
In such a scenario, banks are likely to find the BNPL sector appealing, said Bain's Tijssen.
"BNPL is fundamentally challenging the existing revenue and business model of banks, but big banks have all the right ingredients to turn the threat into an opportunity," Tijssen said. They already offer a variety of credit products and many of the established banking providers have merchant acquiring services, he said.
Consolidation likely
Gary Rohloff, founder and managing director of Australasian BNPL provider Laybuy Group Holdings Ltd., which has more than 500,000 U.K. customers, said the sector's rapid growth in the U.K. was attracting new entrants and that there is likely to be consolidation.
Big banks that do not already have a BNPL experience may buy successful providers, and larger BNPL providers could look to acquire to broaden their operations internationally, Rohloff said.
"I think banks are now taking a hard look at the sector, especially if they are losing market share," he said.
Redburn's Kunwar believes stand-alone, pure-play BNPL operators must evolve, be acquired or end up disappointing on long-term profitability as new entrants and capital flooding into the market put pressure on prices.