How European banks can benefit from Buy-Now-Pay-Later

All three described market trends (adoption of BNPL service across customer groups, regulatory headwind for BNPL-only players, need for customer segmentation to keep costs low) play in favour of European banks.

Banks still enjoy strong relationships with their customers of all ages and, crucially, they are trusted by those customers. They are accustomed to regulations that must be met (KYC, creditworthiness check, lending reporting, standardised legal information, etc.) and have knowledge of their customers' credit histories across multiple product lines or have at least proven processes for credit scoring in place.

In contrast to this competitive advantage, FinTechs are investing millions each year to acquire new customers. In some cases, this race to acquire customers is significantly pressuring their ability to operate profitably. As described above, these same FinTechs are also facing risk of increased losses from write offs and the prospect of rising interest rates. As the market matures, the pendulum appears to be swinging in favour of well managed and well capitalized incumbents with pre-existing access to millions of customers.

Since most customers see BNPL as their means to immediate access to their dream product, a quick and easy onboarding process is key for a successful BNPL product. Also, terms and conditions need to be kept simple and transparent.

BNPL products give financial stability in monthly expenses as it allows customers to spread large costs over a (preferred) duration and enables the payment of sudden expenses without having to drain the savings account. This requires are certain level of flexibility of the underlying BNPL product, so that customers can adjust it to their needs and financial background.

BNPL products allow customers to purchase products on sale that they do not have the money for right now, but do not want to miss the offer. Therefore, fees must be kept at a minimum level such that using BNPL plans is not more expensive than the discount on the purchase on sale. This way, BNPL facilitates commerce and increases average spending.