Banks are responding in force to the fintech-led buy now/pay later craze, leading consumers to ask those startups: What else can you do for me?
Installment loans are, by their nature, meant for a single purchase. Banks are well equipped to turn this interaction into a long-term relationship by cross-selling products such as credit cards to consumers or capital to merchants; fintechs, however, have some catching up to do.
"Our consumers and merchants want more from us," said Vakul Talwar, senior director of product at Afterpay in Melbourne. "Consumers are going to want all sorts of different use cases."
Afterpay, which is in the process of being acquired by Block (the parent company of Square), has introduced several new products in the past couple of months to cater to consumer needs. The BNPL market is expected to grow from $5 billion in 2020 to $20 billion over the next six years, according to
"One of the key issues with BNPL lenders is that they tend to be one-trick ponies," said Brian Riley, director of Mercator Advisory Group's credit advisory service in Tampa, Florida. "They do a good job aligning with merchants, but do not build on the full potential of the customer relationship."
Among Afterpay's rivals, Klarna in November announced plans to launch a
"Most of the major fintech BNPL providers have been broadening their offerings during 2021," said Ginger Schmeltzer, a strategic advisor for Aite-Noveraica's retail banking and payments practice in Decatur, Georgia.
Common value-adds include debit cards, incentive marketing and returns management. "And most large players have a suite of installment offerings beyond 'Pay in 4' to provide flexibility to merchants and consumers across a range of ticket sizes and creditworthiness," Schmeltzer said.
While mainstream financial institutions are pursuing BNPL, the product has become more expensive for lenders.
In an email, Klarna's public relations office said the firm's recent releases also include price drop notifications that cover 250,000 merchants. And more than 2.1 million U.S. consumers have used Klarna's incentive marketing program, Vibe, since it launched in September 2020.
Further economic pressure comes as the BNPL space continues to get more crowded even as consolidation continues across the space, Schmeltzer said.
"What these firms want and need more than anything is consumer loyalty, and they continue to add functionality to attract new consumers and make their service as sticky as possible," Schmeltzer said. The apps "are designed to keep users coming back to the app, following Amazon’s playbook and building toward one-stop shopping," she said.
Since
Most recently, on December 7, Afterpay partnered with shopping and rewards company Rakuten to combine incentive marketing programs and cash-back offers with BNPL, covering retailers including MAC Cosmetics, Crocs, Ulta Beauty, Urban Outfitters, Anthropologie, Free People, Ugg and Ray-Ban.
On Nov. 24, Afterpay launched a subscription service that allows consumers to split recurring payments into smaller installments. A quarter subscription of $200, for example, would be split into four $50 payments over three months. The credit vetting for subscriptions is the same as that of Afterpay's core installment payment option.
"There are other use cases at merchants for BNPL, like pre-orders or subscriptions, that we would like to use to build a network effect for our payment services," Talwar said. "We're trying to build ubiquity for our service."
On Aug. 19, Afterpay launched
"We want to give retailers more insights, answering questions such as What is this Afterpay consumer doing while on the merchant's site?" Talwar said.
The following week the company announced
"Advertising is the next level," Talwar said. "We are going to give retailers the ability to customize their experience on the Afterpay network, through stuff like personalized ads. We can also envision ads for big shopping periods like holidays, where merchants can personalize ads for specific consumers."
Afterpay plans more product rollouts as it awaits the Square deal to close, which is expected in early 2022. For Square, Afterpay is expected to add the third-largest BNPL lender, after PayPal and Affirm, according to
Square did not respond to a request for comment. Afterpay's BNPL service and the new products it launched over the past five months can augment Square's merchant and consumer products, including point of sale credit, Cash App and Bitcoin support, Talwar said. "Square has the seller side and the Cash App side," Talwar said. "We see ourselves as the connective tissue between the merchant and consumer products."
There will be additional product development after the Square deal closes, Talwar said. "With Square there is a lot there to build with and bring new products faster," he said.