By Michael Pierce · March 16, 2022
7 minute read

BNPL: The three waves of incumbent innovation

Buy now, pay later (BNPL), is by definition, an outsider’s – a challenger’s – business model. Like other disruptive models, e.g., Uber and Airbnb, BNPL redefines aspects of both payments and lending, without being reliant on traditional definitions of either. While the concept of BNPL has existed for decades, it’s fair to say that the current rise in disruptive models can be attributed to both a rapidly changing consumer and a paradigm shift towards the experiential economy.  

Michael Pierce, Commercial Director of Banking at FintechOS
Michael Pierce, Commercial Director of Banking at FintechOS

Pioneered by Klarna and a growing crowd of competing startups, key aspects of BNPL include no-money-down and interest-free periods, availability to a wide range of shoppers without the limitations and frictions of traditional payment cards or credit qualifications, close integration in a point-of-sale UX context, and a digitally native approach to customer self-service.  

BNPL is still growing at an exponential rate.  According to Bank of America analysts, the industry is “estimated to grow by ten to 15 times its current size by 2025, representing $650 billion to $1 trillion by 2025 globally”. Last year alone, 55.8% of American consumers used BNPL services, with the user base rising by 85% in 15 months in 2020 and 2021. In the UK, almost 1 in 4 Brits have used a BNPL service, with 9.5m shoppers saying they avoided retailers without a BNPL finance solution at checkout.

With the impressive expansion of BNPL and its consequent impact on established payments and the lending market, we find that the entire established FS industry is currently at a strategic crossroads: players can defend against yet another consumer fintech challenge they didn’t entirely anticipate, or they can “lean in”, learn from what has happened so far, and join this new competitive space. 

We see three waves of innovation from banking and lending incumbents, based on strategic appetite, optimal revenue models, and the time it will take to build solutions and bring them to market.

The First Wave: Direct plays or indirect partnerships 

  • The more digitally ambitious banks and lenders are already looking at how to reverse-engineer the Klarna business model and set up their own BNPL solutions, complete with consumer-facing apps, universal ecommerce checkout integrations, and novel methods of providing instant credit risk evaluation at the point of sale. 
  • This is not necessarily limited to large banks, since tier two banks and lenders may be more digitally agile or possess niche advantages such as regional or vertical specializations. 
  • While “fast-following” the likes of Klarna will be a long game, established banks have the advantage of a proven blueprint to copy, large technical and marketing resources, and an established customer base upon which to launch new offerings. As a result, those taking an agile approach will actually be able to bring competing BNPL solutions to market relatively fast. 
  • Meanwhile, what about those who don’t take this approach of building their own BNPL solutions? Banks with a focus on the BNPL space – or existing relationships with checkouts, ecommerce merchants, or retail brands – will see an opportunity to provide credit and liquidity for the customer-facing side of BNPL, via traditional banking products and services, at the aggregated level, without having to become highly integrated into the customer/order level lending. 

The Second Wave: Experiential/embedded lending 

  • As BNPL becomes more standardized and the number of customer-facing BNPL competitors proliferates, competition will shift to the design and availability of the consumer lending product itself. This will be to the advantage of the established players. 
  • To satisfy this demand, lenders will have to adapt existing products or set up entirely new systems focused on catering to the unique aspects of BNPL lending. 
  • Lenders will successfully build “headless” product engines that are capable of opening new revenue channels via providing APIs for various merchants and e-commerce providers that will allow them the option to offer split payment products during the end-consumers’ checkout process. This leads to higher conversions, and overall, aligns with the paradigm of consumer behavioral shifts towards frictionless banking experiences.  
  • The BNPL space will lead to changes in CX expectations and product design ideas that affect traditional personal lending products even if they are not truly BNPL offers. For example, traditional loans can be better embedded in POS user experiences, with simpler application and onboarding processes, and a direct connection between loan cash and the purchase the shopper is making. In addition, BNPL will force competing lending offers to adapt to smaller lending amounts, a higher volume of transactions, a greater emphasis on fully digital self-service, and more flexible repayment terms. 
  • Since traditional categories of personal loans only cover a small part of the potential lending space, which also includes credit cards and overdrafts, the positive opportunity is huge for players who can get ahead of this disruption.

Third Wave: BaaS 3.0   

  • Banks that have successfully created their own BNPL propositions, or created embeddable lending products for BNPL partnerships, will be looking for new growth opportunities. Banking-as-a-Service provides a model where established FIs can license out their capabilities to a wider range of both cooperating fintechs and non-financial businesses. 
  • As BNPL becomes more constrained by maturing regulation, BaaS models will become more important. Innovators will focus on customer experience and other differentiators, while leveraging underlying technology and the regulatory status of third-party lending providers. 
  • Consumer demand for BNPL and other new forms of borrowing will expand the potential for comparison marketplaces and even instant marketplaces in POS/embedded user journeys, such as automatically picking the best lending offer from a live auction. All of this requires a high degree of embedded sophistication from competing providers, and BaaS providers will help those providers compete on the non-commodity parts of the new markets. 
  • This wave becomes more prominent as cash-rich NFIs enter the banking sphere. These organizations will look to offload deposit-heavy balance sheets to start earning a return on their cash. BaaS providers need to ensure a business model in which both technology and services can be provided to these players. Merchants and marketplaces will be especially interested in this model, as it also enriches the understanding of their end-consumers’ behaviors through analyzing their spending habits. This helps to ensure the right products and services are being offered to the right customer groups. The benefits are endless and continually evolving.  

What’s next? 

According to Bain’s report on BNPL regulation, 49% of online shoppers aged 25-34 reported using BNPL, with the generational shift toward BNPL being even more pronounced among younger cohorts. It’s evident that there’s opportunity in every country and vertical, but especially where e-commerce is strong and the traditional card businesses are less penetrated.  Organizations that cater to markets where there is a rising generation of digital-native consumers, and where they can exploit a defined strategy to attract these kind of banking/lending customers, will also have an advantage.  

As the industry matures, regulation will create restrictions around the BNPL opportunity.  It will also define a clearer space for competition, and competitive strength for incumbents with established compliance teams – ensuring that early movers will reap hefty rewards. 

How can we help?

Everyone from PayPal, Amazon, Revolut and Monzo is now offering buy-now-pay-later financing, and with BNPL predicted to grow even more in the next few years, it’s time to take steps to ensure you’re not left behind.  

The expert team at FintechOS can guide you through our product features for BNPL, including customizable and frictionless POS loans, credit decisioning, and industry integrations and partnerships. Find out how we can help you develop a better BNPL proposition on our BNPL solution page. 


Michael Pierce is Commercial Director for Western Europe at FintechOS.



Photo credit: Mikhail Nilov from Pexels

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