Testing Waters: Confluence of Neobanks and BNPL
Updated: Sep 24, 2021
Neobanking and Buy Now, Pay Later (BNPL) have surfaced as the biggest fintech megatrends in the post-COVID world, alongside Crypto and Open Banking. While both neobanking and BNPL have individually tasted billion-dollar valuations, fund-raising, and public listings in the last 10-12 months, the confluence of these two megatrends promises to have a gigantic impact on the future course of the fintech phenomenon. We are increasingly witnessing a massive crossover between neobanking and BNPL with neobanks across the world launching BNPL products for their customers.
Neobanks in their heyday, having been focused on removing friction in the storage and movement of money, garnered millions of customers. Now, they are attempting to bring the same proposition of convenience and real-time access to funds in the form of instant and contextual credit to their customers in the form of BNPL.
Neobanks' Tryst with BNPL
To better grasp the nitty-gritty of this transpiring shift, a global overview of the many archetypes that neobanks have adopted in launching BNPL offerings is as follows.
Credit-first neobanks like Tinkoff and Nubank have launched BNPL offerings in a bid to expand affordability for their customers by allowing them to avail small-ticket credit on their cards, that can be paid back in installments without interest. Tinkoff has partnered with Dolyame.ru in Russia and Nubank has partnered with Amazon Mexico to launch BNPL offerings.
Transaction-focused neobanks in the UK and Europe with massive customer bases like Revolut, N26, and Monzo have also set the BNPL sail in their quest to have a primary relationship with the customers and to explore new revenue streams. The BNPL offering also allows these neobanks to up the ante with credit products as a key part of their business model without exposing themselves to massive credit losses and help their customers (primarily the GenZ and Millennials) build credit scores as they repay their pay-later loans on time.
US-based neobanks with a comprehensive product portfolio, such as Marcus and MoneyLion, are having a go at BNPL offerings in a bid to extend their financial wellness propositions. Another US neobank, Douugh, in partnership with Humm, put their own twist to the financial wellness proposition with Credit Jar, an approach towards “Responsible BNPL”. Credit Jar will have a dedicated linked virtual Mastercard to it, and customers will be subjected to full credit and responsible lending checks. It is intended to be used as a safety net for unexpected expenses, rather than a way to encourage impulse purchase.
Consortium-led licensed virtual banks in Hong Kong such as Mox, Za, and Livi have set up BNPL coupled with their card offerings. The aim is to ensure better planning of customers’ spending budgets and helping them take control over monthly cash flows.
Emerging markets have also seen neobanks warming up to pay-later products. TymeBank in Africa and credit-led neobank Freo in India launched BNPL for their customers.
BNPL Firms in a Neobanking Avatar
One name that shines amongst the sea of the BNPL game-changers is that of Swedish fintech Klarna, who secured a banking license in 2017, intending to create a ‘financial super app’. With already having the operation of saving accounts in Sweden under its belt, the BNPL fintech has an ace up its sleeve by offering bank accounts to limited users across Sweden and Germany. An assortment of features such as direct deposits, Apple Pay and Google Pay compatible debit cards, and budgeting tools that help customers track their spending adds up to be the cherry on top of the offerings cake.
Jostling further into consumer finance, American Investment Bank Goldman Sachs' USD 2.24 billion all-stock deal for acquiring fintech lender GreenSky is all set to be finalized by Q1 2022. This mention is incomplete without highlighting the acquisition of Afterpay by Square, and throwing light on the M&A agreement between Synchrony and point-of-sale consumer finance provider Allegro Credit. The acquisition is key in shaping the future of CareCredit, the health and wellness financing platform.
An Intriguing Future Awaits the Crossover
The absorption of all the happenings in this captivating fusion is sure to raise not only a lot of eyebrows but also a flood of questions. The ones that stand out from the crowd are the questions of 'how': How will these ventures boost money-making? And then the 'why': Why plummet into this prospect in the first place?
The answer lies in the numerous trump cards that this confluence is expected to unleash. Launch of BNPL offerings from already flourishing (in terms of the number of customers and valuations) neobanks is an approach that can elevate customer engagement to new heights. From a behavioral perspective, these launches are targeting to have users consider their neobanking accounts as their primary accounts.
However, pure-play adversaries like Klarna and Afterpay enjoy a healthy dominance and better unit economics by having their payments and settlement rails. Neobanks can gain leverage in terms of the card-linked BNPL offering massive acceptance at any merchant worldwide, and providing payment protection for the purchase. Neobanks’ card-linked BNPL offering also brings additional value in terms of better fraud detection mechanisms, dispute resolution frameworks, settlement and reconciliation processes for the parties involved.
The final driver (or inhibitor) for these crossovers will also be dictated by regulatory stance by authorities in key regions. Until then, whatever edge-of-the-seat developments are in store for this confluence of BNPL and neobanking, we can only predict now, witness later.