Consolidation of the BNPL industry: what does it mean?

Buy now, pay later (BNPL) services have grown significantly, especially since the onset of COVID-19, which accelerated digitisation, merchant adoption, and consumer demand.

Collaboration can prove mutually beneficial for banks, financial institutions and fintechs

With customers opting for new online payment methods, more and more online and in-store retailers are partnering with BNPL platforms. Plus, the BNPL finance sector is heating up as more young people turn to these services, with 36% of those aged 21-25 using BNPL in the US, according to Forbes.

With the growing BNPL sector largely unregulated and debt accumulation untraceable, the regulator is sitting up and taking notice. Regulation is bound to happen and will shift the entire BNPL space, leaving a void in the market for compliant providers. There is a window of opportunity to fill this void, and this is where collaboration comes into play.

According to McKinsey’s Consumer Lending Pools data, fintechs currently hold the majority of the BNPL market share and have already captured about $8-10 billion in annual consumer financing revenue.

However, banks have been actively moving into the space. As they are already compliant with financial regulation, they just need a way to bring their competitive consumer financing programmes to the point of sale (POS), which is when they look to collaborate with fintechs.

Therefore, consolidation will be driven by banks and financial institutions looking to leverage fintechs’ technological solutions in order to become strong BNPL players, and not only by fintechs rushing to partner with banks to become compliant.

The growing benefits for both parties are driving cross-industry consolidations and partnerships. Successful partnerships are not only those that allow for regulatory compliance but those based on the alignment of values and enhancement of the core strengths of each party.

The arrival of acquisitions

Mergers and acquisitions (M&A) typically involve one entity realising that another company brings value and potential. Often this results in one company swallowing up another. In my opinion, though, the real power of consolidation lies in acknowledging and retaining the true nature of each company to contribute to mutual growth.

For example, acquisition can be restrictive since the secondary entity’s entire mission often serves the primary company’s purpose instead of serving its own innovation and growth goals.

True partnerships forming

On the other hand, in the case of partnerships, the collaborating companies equally benefit from each other’s audience and reach. Instead of inhibiting each other’s growth, true partnership stimulates growth and encourages cross-pollination from one to another. I’ve always found that true collaboration is based on mutually beneficial partnerships and shared values.

An example of such partnership is Klarna and Stripe, two of the world’s biggest private fintech companies, that teamed up but still retained their own independent identities. Stripe agreed on a strategic partnership with Klarna to offer the Swedish firm’s BNPL payment method to its merchants without acquiring the company.

Without these kinds of mutually beneficial partnerships between banks and fintechs in the BNPL space, banks will not only lose out on loan volume but also miss out on consumers as they divert to fintech companies. Through partnering with fintech providers, not necessarily through acquisition, banks can regain and keep their consumers close and strengthen the customer relationship, value, and experience.

Global expansion for the win

Recently, Global Processing Services raised over $300 million to accelerate the global technology and fintech revolution, showing the significant role of the fintech industry worldwide.

While some may argue that the most successful fintechs maintain a niche in terms of markets and products, others favour expansion.

Global expansion to different markets, through consolidation and partnerships, fuels innovation and out-of-the-box thinking as companies face new issues and need to come up with solutions to different markets’ demands. It also means companies can apply fundamental learnings from one market to another and widen their customer range by partnering with entities with a global presence.

As the traditional financial barriers break down and the world becomes more interconnected simultaneously, the newly evolving cross-border collaborations and partnerships between fintech companies and banks will be essential for the future of the financial services industry and technology sector.

COVID-19 has also proven that it’s not just large corporations and financial institutions that can adapt to a ‘digital-first’ approach. In fact, their timelines for introducing new products must speed up dramatically, which can be achieved through partnerships forged overnight. Expect to see many more of these happen – very quickly.