S&P Global

Banks outsource buy-now, pay-later to new class of fintech firms

October 5, 2021

More banks are taking the “if you can’t beat them, join them” approach to buy now, pay later.

Banks of all sizes are turning to a new cottage industry of financial technology software providers who build BNPL platforms for bank clients. The effort gives banks a shot to take market share in the space from the fintech giants like Square Inc. and PayPal Holdings Inc. that are spending billions of dollars in M&A to acquire BNPL lenders.

Such outsourcing helps banks accelerate the technology development and bring BNPL products to the market faster. The speed to make BNPL products available is especially key in the current marketplace, as fintech BNPL specialists such as Affirm Holdings Inc. are rapidly expanding their product suites into more financial services arenas. Meanwhile, merchants have shown strong interest in deploying this point-of-sale financing product, which allows consumers to split the purchase price at checkout, typically into four equal payments over a period of weeks or months.

Midwest regional First National Bank of Omaha is one such bank offering installment financing at the point of sale. The bank began “getting very serious” about developing BNPL products about a year ago and will go live with its first merchant, sporting goods store Scheels, in October, said Jerry O’Flanagan, executive vice president of the bank’s partner customer segment. It developed the financing product in six months in tandem with digital transformation company EXL and fintech vendor Skeps.

“I felt a sense of urgency that we needed to bring a product into the marketplace quickly, and it really would have been difficult to do if we relied solely on our internal capacity,” O’Flanagan said in an interview.

First National Bank of Omaha wanted to make the loans itself and control the customer experience from start to finish, to avoid potential reputational and financial risk, O’Flanagan said. In the past, banks have functioned as partners for the fintech BNPL lenders such as Affirm, Klarna Holding AB (publ) and Afterpay Ltd. by purchasing loans they make. That gives the banks a boost to their loan totals, while the BNPL firm manages the relationship with the merchant and builds rapport with consumers.

Major fintech BNPL lenders have seen rapid growth during the pandemic driven by the e-commerce boom and merchants’ demand to engage with consumers in digital manners. Affirm, Klarna and Afterpay have all more than doubled the gross merchandise value over an 18-month period between January 2020 and June 2021, according to data compiled by S&P Global Market Intelligence. The fintech firms use gross merchandise value to measure the value of goods and services their loans have purchased.

Continue reading at spglobal.com

Jifiti powers white-labeled embedded lending solutions for banks, lenders and merchants.

Let’s Talk Embedded Lending

Hi, I'm Nick.