The Secret Weapon That’s Helping Banks Beat BNPL Klarna’s $45.6 Billion Trajectory

by Yaacov Martin


July 6, 2021

With banks losing significant market share to BNPL Fintechs offering quick plug-and-play POS financing solutions, there’s a frantic race in progress to catch up to and surpass these incumbents. Only the quickest and smartest BNPL (buy now, pay later) providers will prevail.

But bankers need not despair – they’re actually better positioned than Fintechs to capitalize on this consumer financing revolution, if they act now. 

While Klarna’s recent $639 million funding round and $45.6 billion valuation, as well as Affirm’s successful IPO, means that the competition is tougher than ever, banks have a real chance to succeed. It may seem counterintuitive, but the booming success of Fintech lending is good news for traditional banks. Great news, actually, as it’s laying a very strong foundation for the exploding BNPL space and paving the way for greater awareness of and demand for POS financing solutions.

The rapid growth and popularity of POS consumer financing means that banks seeking to expand their market share need to act quickly and immediately. With so much at stake, how can banks ensure that they don’t miss out on their slice of the rising POS financing pie? What is their secret weapon to success?

Fintechs vs Banks: The secret to BNPL success

While Fintechs are currently winning the battle, banks will ultimately win the POS financing war. 

The secret to success is simple – the cost of capital for Fintechs is significantly higher than it is for banks.

Traditional banks are backed by powerful funding sources that Fintechs cannot compete with. When banks lend directly to consumers, they leverage cheap capital from deposits, savings accounts and other standard banking activities. 

But when a Fintech lender needs capital to fund loans, they source it from a bank, investors or professional lenders who dictate terms, resulting in a higher cost of capital. New Fintechs need to scale tremendously to compete and to cover the cost of the money they are using to issue loans. This higher cost of capital then translates into higher fees for merchants, averaging from 3% to 6% per transaction, compared to the rate of 1% to 3% that banks could provide.

It’s not only the low cost of capital that gives banks a significant edge, they have other advantageous cards up their sleeves. With centuries of experience in risk assessment, banks know best how to qualify, manage and service consumer loans. Fintechs, on the other hand, have built their own front-end application processes and back-end decision engines based on analytics, algorithms, and data that is more limited than that of the banks. 

With all these points in their favor, banks can make real in-roads into the POS financing market and win back their share of the consumer financing market from Fintechs. 

As long as they can get all their technological ducks in a row.

The (surmountable) challenge faced by banks

While low cost of capital gives banks an edge over Fintechs, how can they implement a POS financing solution without heavily investing in technological development?

When it comes to financial disruption, slow and steady does not win the race. Time to market is a critical factor, so early adopters will be most likely to secure and capture market share.

But bringing an in-house, proprietary POS financing solution to fruition is a costly and lengthy process, requiring agility and expert knowledge that banks simply do not have.  

Strength in BNPL allies

A bank’s winning formula is to form an alliance with a technologically-advanced POS financing solution provider. The right ally can separate the winners from the losers, drawing the line between victory and defeat.

Partnering with an established POS solution provider is a bank’s best bet for rapid entry, cost-effectiveness, and an optimized customer experience. With a white-labeled, fully-functional digital platform, BNPL integration can be frictionless, fast, and highly scalable.

Large banks in the US and Europe have already partnered with companies delivering smart, white-labeled solutions that can be quickly deployed at point of sale, both online and in-store. This delivers a critical advantage, enabling banks to get their loan offerings in front of thousands of additional consumers quickly and propelling increased revenue and market share.

Winning the BNPL war

Even though it seems as though Fintechs are leading the battle, winning the consumer financing war is within reach for banks that act quickly and choose their allies wisely. With their low cost of capital, refined approval process and a white-labeled BNPL platform in hand, banks are set to become the POS financing market leaders.

And they’ll likely achieve success faster than expected.

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