The rush of FinTechs into the installment loan market is creating a threat for the banks that were the first to get there. But for banks that have remained on the sidelines, the best way forward may be to partner with a fintech rather than back down.
Early movers, such as Citizens Bank of Providence, RI, have already claimed the biggest customers. Citizens developed a personalized financing approach for Apple iPhones six years ago, and that work is paying off now, said Eric Schuppenhauer, head of consumer loans and the national bank.
Xbox All Access, a finance option for Xbox consoles, is another implementation of Citizens’ BNPL services, and the bank is experiencing strong growth in categories such as furniture, fitness and healthcare.
“We didn’t create this overnight – we started in 2015 – and we have a lot of investment, a lot of technology and thinking to develop this set of products and it’s not something easy to do. come in, ”Schuppenhauer said.
As with credit cards, the goal is to be the best choice at the point of sale.
“There is a distinct first-in-place advantage, as the merchant commits to a BNPL platform, they are unlikely to move it,” said Richard Crone, principal at Crone Consulting LLC.
What consumers appreciate about BNPL loans is greater flexibility and predictability of payments, where buyers can essentially choose their own terms by deciding how much to repay and over how many months.
Merchants who see how the digital channel drives more online sales also see the need for instant funding in this environment, Schuppenhauer said.
“A lot of retailers wanted to add BNPL to survive during the pandemic, but I think that’s a trend that’s going to continue as people change their [shopping] behavior, ”he said.
What fintechs have brought to consumer lending are software development kits and APIs, enabling a turnkey process for merchants to add instant financing online or at the point of sale, and banks are now rushing to add these capabilities through partnerships and acquisitions.
The concept of lending to merchants is not new, as Capital One, Wells Fargo, Citibank, Synchrony, and others have provided similar services for years to merchants with private label cards.
“What’s new is offering personalized credit with machine learning that opens up the range of FICO scores available for landing at the point of sale, like all fintechs do without a card,” Crone said.
Some large merchants offer several traditional credit card and installment loan financing options online, but as BNPL expands for in-store purchases, the preferred model will likely be that of a vendor, Crone said.
“The challenge for merchants on the e-commerce and app side is to keep it simple and straightforward, and they probably won’t want more than one BNPL provider, especially for installment loans offered in stores, this that’s going to be the next big wave of growth in this area as we come out of COVID-19, ”Crone said.
For private label lenders, one of the challenges is determining the economics of existing private label card offerings versus installment loans, how to do direct installment loan – bridge payday which typically target young consumers but also attract existing card borrowers who want to buy. some items with different conditions.
Alliance Data, which provides private label credit cards to a number of U.S. merchants including apparel marketers, opted last fall to acquire technology provider BNPL Bread for $ 450 million in order to speed up installment loan tools for traders.
The deal was finalized in December and Allianc this week announced a partnership extending Bread’s BNPL services to retailers using Fiserv’s merchant acquisition services.
Banking technology platform providers Fiserv and FIS are meanwhile expanding BNPL’s capabilities to smaller financial institutions, and card networks have built BNPL engines available to card issuers.
Barclays US chose the partnership path this week, partnering with Chicago-based fintech Amount to achieve rapid merchant onboarding for white-label BNPL services. Barclays plans to market the solution to existing co-branded credit card partners and other merchants in the coming months.
Unlike many fintechs that prey on merchants with BNPL offers, Amount sees a greater opportunity in suing banks that have to offer installment loans.
“We bring our solution directly to the banks and we are working to develop a rapid process to integrate them,” said Adam Hughes, CEO of Amount.
Merchants will have many options to choose from as banks expand BNPL services and fintechs expand their menu of installment loans, said Ginger Schmeltzer, senior analyst at Aite Group.
“Retailers – especially online – are increasingly willing to entertain multiple BNPL vendors because a consumer may prefer one or the other installment lender,” Schmeltzer said.
But banks have several advantages when deploying BNPL options, she said.
“Lenders like Citizens and Barclays are known and trusted names, and it’s better than being a totally unknown commodity. Banks also have a lower cost of funding and more loan management tools than fintechs, ”she said.
The next big wave of BNPL loans will affect small traders, predicts Schmeltzer.
“Merchants of all sizes are seeing higher sales thanks to installment loans and there is still a lot of growth opportunity here for banks and fintechs,” she said.