In 1949, a New Yorker named Frank McNamara conceived the idea of a card to settle bills at his favorite restaurant at the end of the month, rather than after each meal. Thus, the first modern credit card, known as the ‘Diner Card,’ was launched in 1950.
Within a few years, the Diner Card’s popularity prompted major banks to recognize the potential of this new market, leading them to introduce their own Credit Cards.
While credit cards have become commonplace, a new form of ‘point-of-sale-lending,’ known as Buy-Now-Pay-Later (BNPL), has been gaining momentum in recent years, pioneered by companies like Affirm and Klarna.
Despite recent economic fluctuations affecting the valuations of these BNPL companies, the BNPL feature continues to thrive in the checkout process. According to Worldpay, BNPL accounted for 3.8% of North American e-commerce transactions in 2021 and is projected to grow to 8.5% by 2025. Juniper Research predicts that the number of BNPL users globally will surpass 900 million by 2027, up from 360 million in 2022.
Gen Z, in particular, prefers this financing trend, with adoption rates among this population segment expected to increase from 36.8% in 2021 to 47.4% in 2025.
Much like the origin story of Credit Cards, the growing BNPL market has caught the attention of banks, and they are joining in to tap into the millennial and Gen Z demographics. JPMorgan Chase and Citibank were the first movers, with US Bank being the latest to enter this market.
The increasing participation of banks brings good news for businesses dealing with high transaction fees when partnering with BNPL companies. BNPL companies, acting as middlemen relying on loans, can be bypassed by businesses collaborating directly with banks, lowering BNPL transaction fees and boosting profitability.
However, the successful rollout of payment products today requires collaboration with fintechs to navigate the complex payment stacks powering modern businesses. While banks excel as stable capital providers, they lack the incentive to build such tech capabilities in-house. For instance, this is why fintechs like Paypal and Stripe emerged as the bridges connecting consumers, businesses, and banks in online payments space.
This is where the current BNPL leaders, with technology as their core competency, hold a significant advantage. But this advantage may be short-lived.
In a bid to democratize the BNPL tech-stack, new fintechs like Pier are championing an API-driven ‘DIY’ approach. This enables businesses to create their own BNPL offering by partnering with willing banks. Pier’s out-of-the-box solution handles the heavy lifting previously involved in rolling out BNPL – from regulatory compliance to technical integrations.
This development presents a choice for businesses reliant on BNPL services: stick with traditional providers like Affirm or venture into the DIY route offered by fintech disruptors.
While Pier’s developer-centric approach simplifies the BNPL setup, the decision hinges on factors like magnitude of cost savings through direct bank partnerships and he ease with which businesses can partner with these financial institutions.
While Pier’s developer-centric approach simplifies the BNPL setup, the decision hinges on factors like the magnitude of cost savings through direct bank partnerships and the ease with which businesses can collaborate with financial institutions.
Beyond these considerations, the efficacy of the DIY model’s lending algorithms compared to established players like Affirm becomes critical. Making sound lending decisions in real-time is crucial for underwriters to successfully support this alternative credit form. However, the heavy reliance of BNPL companies on third-party data sources and the expertise of banks as experienced credit providers could mean this challenge may not be insurmountable.
The DIY approach might just be the next step in the evolution of how consumers access credit and how businesses facilitate these transactions. Whether BNPL providers will maintain their stronghold or cede ground to DIY model remains to be seen, what’s clear is that as competition intensifies, businesses stand to benefit.