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

​Buy-Now-Pay-Later (BNPL) surges in popularity across Europe, with an expected year-on-year growth of 20-25% over the next seven years - as confirmed by various studies. However, much of that growth to date has come from non-bank actors, such as Klarna, AfterPay or retailers. Furthermore, Millennials account for most of the growth to date, while regulation of BNPL seems to increase.

​BNPL market is facing some changes and from a Nets' perspective we see three market trends unfold: 

1.       All age groups are starting to adopt BNPL as a payment method

BNPL services were initially a quick means of accessing small amounts of credit and attracted primarily cash-strapped Millennials. However, in a world that becomes more and more digital, customers across all age-groups in Europe appreciate the ease of use and flexibility that BNPL offers compared to traditional credit solutions.

2.       Regulation of BNPL is expected

Regulators across Europe are expressing disquiet at the rapid growth of BNPL and warning consumers to be cautious, especially in context of hidden high interest rates and the dangers of too much credit. Legislators in Europe and UK (in addition to US, Australia and Singapore) and other countries, as well as consumer associations, are taking notice and starting to close gaps in market regulation. We assume that unregulated BNPL-only players will face significant regulatory headwinds in the next 24 months.

3.       Price pressure will grow due to increase of financing costs

If the central banks get serious in the future and raise interest rates (further), this will make funding of BNPL-only players more difficult, ergo, BNPL either becomes more expensive for customers or reduces the low margins on the supplier side. One conceivable solution to keep BNPL costs as low as possible while protecting profit margins as much as possible is to price customers accordingly and offer different prices for different customer segments.

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​European banks are well-equipped to play a bigger role in the BNPL market

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.

Good BNPL solutions are simple, transparent, flexible and trustworthy

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.

In conclusion, if banks take the following four points to heart, they can take advantage of the opportunities offered by the BNPL market and as a result, customers will benefit from outstanding user experience and banks can increase their profitability:

1.  Keep it simple
2. Be transparent
3. Allow flexibility
4. Build trust

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