UK banks are rushing to buy now, pay later despite rising default risks and growing regulatory scrutiny, in a defensive effort to win back younger users who are more comfortable with fintechs like Klarna than credit card.
With more nimble rivals attracting younger customers, NatWest, Virgin Money, HSBC and Monzo have all launched BNPL products – which allow users to defer or split payments for purchases – in the UK over the past year. past year.
“It’s no surprise that banks want market share buy now, pay later,” said Amy Gavin, senior strategist at fintech consultancy 11:FS. “Vendors that don’t offer this risk losing access to their customers, especially millennials and Gen Z.”
Fintechs such as Sweden’s Klarna – formerly Europe’s most valuable private tech company before its valuation crashed in its last funding round – have benefited greatly from the surge in online shopping and demand of BNPL triggered by the pandemic.
Researchers from the Universities of Chicago, Warwick and Nottingham estimated that the UK BNPL market grew to £5.7 billion in 2021, more than double the figure calculated by the Financial Conduct Authority for 2020.
“The support was ahead of what we expected,” said Monzo chief executive TS Anil of Flex, the service he launched in September, which he said was “the right long-term game” for the neobank.
Several bankers said they did not expect their products to generate significant revenue in the short term, but would provide them to younger customers who request the service.
A banker said he did not expect to make money from BNPL, but was worried about the threat posed by fintechs if they branched out to offer other services.
Lenders have sought to position their products as responsible alternatives to cardholders, who face questions regarding the affordability of their loans.
Traditional BNPL transactions relied primarily on soft credit checks, which attempt to assess creditworthiness typically using data provided by consumers. These are not visible to other lenders and leave no permanent record, raising concerns that users could fall into debt with a number of companies. A growing number of suppliers have started reporting their transactions to credit reference agencies.
In contrast, banks offering BNPL perform a more comprehensive search of a consumer’s financial record, which may uncover instances of default or late payment. These stricter credit checks are recorded in applicants’ credit history and may affect credit scores.
“We are concerned that users’ credit performance may suffer from the unregulated use of buy now, pay later,” said David Lindberg, managing director of retail banking at NatWest. “As more and more of our young customers are using these services, we want to offer an alternative.”
NatWest’s BNPL option, launched in June, is available to account holders over the age of 18 earning at least £10,000 a year, in line with its basic credit card criteria.
In June, the government announced plans to tighten industry rules, including requiring companies to verify that customers can afford to use their products. However, regulation is expected by 2023 at the earliest.
UK banks could also benefit as incumbents face rising rates and a cost of living crisis that is squeezing borrowers and hitting valuations – Klarna has seen its valuation slashed from $46bn to less than $7 billion in July and US-based Affirm has suffered an 80 percent drop in its share price since November.
Analysts also point to a number of advantages that banks have over cardholders.
“They have an existing customer base and significant ‘cheap’ lines of credit already in place,” said Rohit Mathur, a partner at venture capital firm Digital Horizon that invested in Klarna.
Gavin at 11:FS said the size of banks could allow them to charge retailers lower transaction fees, undermining existing providers who already operate on extremely thin margins.
UK equity research firm Redburn estimated in 2021 that incumbents made an average of 0.3 points in gross profit before operating costs.
However, banks will also have to deal with late payments and defaults.
NatWest charges a fee of £12 a month if payments come more than a day after they are due, while Monzo said it would try to take a lower amount by switching to a longer-term installment plan.
By contrast, Virgin said it would not charge late fees, an approach already taken by some buy now, pay later providers in the UK, including Klarna.
But while many lenders are rushing, others are holding fire.
“It’s a risky time to start [a buy now, pay later product] in a bearish credit cycle. It’s a product for people who tend to struggle with credit, after all,” said a bank executive. “Do we want to open ourselves up to the credit and reputational damage that comes with it?”