Banks are best placed to drive instalments market forward

By John Mitchell
Banks are the most suitable custodians of instalment solutions, like buy-now-pay-later (BNPL), argues Episode Six CEO and Co-Founder John Mitchell

The instalments market has thrived in recent years, sailing to unprecedented success in a low interest, low inflation market. Take Buy-Now-Pay-Later as an example, during the COVID-19 pandemic, use of the payment scheme increased fourfold in the UK, to the tune of £2.7bn in transactions.

But now, that’s all changed. Inflation and interest rates across Europe have reached multi-decade highs and the providers originally driving the BNPL revolution are struggling to navigate this tough economic period. 

Provider woes

Lower fintech valuations and the slow decline of the ecommerce boom, buoyed by COVID-19 has impacted BNPL providers across the globe. Firms in the US have seen valuations drop and stocks plummet. Australia has seen the high-profile collapse of one provider and earlier this year, European BNPL poster child Klarna, reported the biggest annual loss in the company’s history. The misfortunes of these organisations show that BNPL is currently at a crossroads.

It's not just economic conditions impacting BNPL providers, new regulatory requirements are adding to the pressure. BNPL has been no stranger to scrutiny. Easy access to credit can encourage overspending, especially among younger, less educated consumers. BNPL services can lead to debt accumulation over time, thereby negatively impacting credit ratings. For example, a study by Barclays revealed that nearly a fifth of 18–34-year-old BNPL users have had their credit score impacted due to missed BNPL payments. Also, a quarter of BNPL users expressed concern about their ability to repay their BNPL bills.

Regulatory headaches

Governments around the world are taking note, with the UK being further ahead in its regulatory framework to protect consumers from being exposed to financial harm. The UK has been consulting on draft legislation to regulate “certain exempt interest-free credit agreements” i.e., Buy-Now-Pay-Later services. Under the draft proposals, BNPL products would be regulated by the Financial Conduct Authority (FCA), which would have the power to ban BNPL companies from further lending if found to be in breach of its rules. 

However, the current move to regulate BNPL has not been welcomed by everyone in the industry. Fintech industry body Innovate Finance has said its members are "deeply concerned" by the UK government's plans to regulate the Buy-Now-Pay-Later sector, arguing that the measures would be more onerous than those that apply to credit cards. Providers Klarna and Block have labelled the proposals ‘outdated’. 

Consumer demand is there

While these trends and new regulations may reduce the hype around BNPL, and some of the pioneers of the service, consumer and business demand for payment instalments will not. Instalments payments are now available to use for a wider array of purchases. The payment method, traditionally associated with electronic goods and the travel industry, has now expanded to everyday items, even takeaway services such as Deliveroo added payment instalments as an option in 2022. And amid growing financial pressures, more customers are welcoming the ability to break payments up into smaller, more manageable, instalments.

The Buy-Now-Pay-Later market is still expected to reach $3.98 trillion by 2030. In the UK, more than a third (35.5%) of people have said they have used BNPL in the last 12 months, according to money experts Finder, who surveyed 2,000 people across Great Britain at the end of January 2023. Interestingly, the demographics of BNPL users is changing. While consumers in their 20s and 30s represent the highest proportion of BNPL users, the fastest-growing age group turning to BNPL is those over 55. Almost a fifth (18%) of consumers aged 55+ have used BNPL and half of them started using it within the last 12 months.

Who’s best placed to drive BNPL?

Banks and big tech companies are looking to capitalise on this demand. The question now is, who can offer instalments securely, efficiently, and profitably?   

Banks have the opportunity to roll this service into their credit offerings, helping protect their core business from the wider payment instalments market, which has recently been seen as a threat to credit cards. Banks can extend this service to non-customers and expand their addressable market. The robust nature of banks means they have the cash reserves to facilitate payment instalments and satisfy consumer demand. And, while the spectre of impending regulation may haunt BNPL providers, Tier 1 and 2 FIs have a lengthy history of working within existing regulation and compliance requirements. When these new requirements are enacted, it will impact the ability of BNPL providers to continue business as usual. This will create an opportunity for a well-prepared and well-positioned Tier 1 or 2 FI to act.

The technology dilemma

As the instalments market gets increasingly crowded, consumers will be looking for a better user experience. But to offer instalments or ‘deferred’ payments, banks need a future-ready technology stack that enables them to offer the popular payment products of today and of the future. The dilemma facing banks is that updating technology can be risky for institutions, especially when using full rip-and-replace methods.

Banks’ IT departments generally lack the budget and other resources required to make wholesale changes to existing tech stacks. Oftentimes middleware may be bolted on legacy systems which present their own set of complications and challenges. To overcome these challenges and to capitalise on the advantageous position banks have to drive the instalments market forward, collaboration with a payment technology provider to help progressively modernise current technology is essential. A progressive modernisation approach, that involves integrating new platforms alongside legacy systems, can be a much safer option while still achieving transformation goals.

Selecting a bank-grade partner

In a segment that has few providers with the benchmarking and resilience financial institutions require, a bank-grade partner needs to be selected. One that can provide a bank with the flexibility to build a product tailored to its unique instalment use. From pre-purchase loans to at-retail QR-driven BNPL to post-purchase transaction conversion, whilst all being accessed through one API.

Yes, banks are best placed to drive the instalments market forward, but they’ll need support from payment technology providers to put them in pole position.

About the author

John Mitchell

John Mitchell is CEO and Co-Founder of Episode Six. He brings decades of fintech and payments technology expertise in leading and growing companies and startups. Prior to E6, John built payment platforms and programs across multiple continents. He began working in payments at Netspend Corp., where he built its distribution network and spearheaded its go-to-market strategy.

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