In the BNPL Future, Everyone is a Lender

Ask a young person the last time they used cash, or even a physical credit card, to make a purchase and you’ll likely be surprised. In the last 18 months, digital payments have exploded in the United States, following similar trends already established in Asia, Europe and Latin America. Consumers, especially young millennials and Gen Z, have quickly embraced contactless payments, instant money transfer, and single-use digital credit cards. Fintechs like Stripe, Plaid, and Venmo have enabled a whole new world of digital payments, and one type of digital payment that has particularly surged in popularity is buy-now-pay-later, or BNPL.

Other large fintechs, like Affirm, Klarna, Sezzle, and Afterpay, recently acquired by Square, as well as many other startups, have made BNPL increasingly commonplace for consumer transactions. BNPL infrastructure providers enable retailers to offer lines of credit to shoppers at the point of sale so they can buy products on installment at zero or very low interest. BNPL is convenient for people without credit cards or who want to avoid the hefty fees charged by credit card companies.

Many Americans first got a feel for BNPL through phone purchase plans, where the cost of their new iPhone is spread over 24 months, and the practice is now popular for other high-value items such as Peloton bikes, game consoles and furniture. In the last year, one in five Americans made a BNPL purchase, and by 2025, consumer BNPL transactions could reach $680 billion worldwide, doubling from 2020. The U.S. has a lot of catching up to do. In countries such as China or Argentina, BNPL is so prevalent that consumers can “pay later” for a Big Mac or subway ride.

Upgrading digital lending technology

As BNPL continues to spread, along with broader digital lending programs, it provides a slew of challenges and opportunities for all lenders, from large fintechs and banks, to non-bank lenders, payment processors and merchants alike. BNPL innovation is accelerating the trend of “everyone can be a lender”, but with new lenders and lending programs comes additional technology needs to support these digital lending initiatives. Fintechs will need to upgrade their back-end loan-servicing and collections technology to enable larger BNPL volumes. Banks will need to replace legacy back-office systems to make BNPL possible on technical, regulatory, and compliance levels. Retailers of all sizes will look to embrace embedded finance, becoming lenders themselves, as they deepen their relationships with customers.

As investors in fintech companies for over 20 years, we see BNPL as yet another example of innovation and disruption at the intersection of payments and digital lending, with billions of dollars of opportunity for savvy fintechs that provide the technology platforms to enable BNPL. Already, some BNPL fintechs are getting snapped up by banks, such as Goldman Sachs’ recent $2.2 billion purchase of BNPL fintech GreenSky.

Fintechs will enable BNPL growth

Fintechs are at the forefront of the BNPL ecosystem, powering both the front-end consumer interactions with BNPL and back-end lending and collections needed to make it work. But most fintechs still have a lot of work to do to make BNPL 100 percent safe, commonplace, compliant and accessible. Many still need to upgrade their technology to propel BNPL into the future. The legacy banking and lending platforms they rely on are giving way to digital-first providers, especially when it comes to mission-critical systems like loan-servicing software.

The BNPL frontend experience to make loans is already well established, but the legacy technology powering loan servicing was not built for digital-first lending and needs to catch up. Fintechs like LoanPro (an FTV investment), Klarna and PayPal are already improving the security, speed, transparency and compliance of BNPL loan servicing.

As BNPL grows, there will also unfortunately be an increase in late payments, non-payments and collections that will necessitate more robust loan servicing, done at a digital scale. Better back-end loan servicing could also allow BNPL fintechs to enter new sectors, such as healthcare, insurance, rent and groceries, as well as accept foreign currencies.

Traditional lenders like banks are increasingly competing with fintechs, so they will also need to upgrade their technology to support BNPL, among other types of digital lending initiatives. As fintechs continue to elbow in on banks’ core markets of accounts, payments, and lending, banks can take a lead in BNPL by improving loan servicing on the backend, which allows their organizations to streamline borrower experiences on the frontend.

BNPL is here to stay. Consumers worldwide love the seamless, point-of-sale experience of buying products on installment with zero interest; retailers love that BNPL is a simple, low-fee way for consumers to pay; fintechs and banks love how BNPL opens up an entirely new world of digital lending. Investing in technology to support BNPL, among other digital lending initiatives, will be a top priority for all types of lenders (fintech, bank, non-banks, retailers, etc.) if they want to be successful in the new era of digital-first lending.

Robert Anderson is a partner at FTV Capital where he leads investments in financial services and payments and transaction processing. He has been a growth equity investor at FTV since 2010.