Why neobanks risk failure in the buy now pay later industry

By Neha Mittal, CEO at Divido

Buy now pay later (BNPL) is rightly among the hottest trends in the retail industry right now. But is the entrance of neobanks into this already crowded market a good or a bad thing for consumers? 

The trillion dollar industry is growing at a rate of 20% year-on-year, driven by Millennials who increased their spend via BNPL at the Point of Sale by a staggering 87% in the last 12 months alone.

But one thing is for sure - those early adopters that gained market share now face challenges from all sides. Monzo, Revolut and Lunar are among those looking to grab market share, but I don’t believe their entrance will be as consequential as commentators have suggested.

An uncompetitive edge 

It is reasonable for them to enter this huge, fast growth credit industry.

Conclusions can quickly be drawn as to their intentions (i.e., generating profit over customer satisfaction), but in this instance, it’s a little more complicated than that. 

After analysing the plans these banks have for BNPL, competing is clearly not at the top of the agenda. First of all, neobanks aren’t charging the retailer, which is where the likes of Klarna and PayPal generate their revenue. 

Therefore, the only way they can offer BNPL is through charging the consumer, so it’s more of a line of credit than a genuine BNPL product. They’re also asking for the first payment upfront, which makes their solution more of a ‘pay now – and pay more later.’ 

As a further blocker, you have to open a bank account with the neobank to use the service, which is an inconvenient step that can be avoided through the use of other BNPL providers. 

A disregard for retailer needs 

Retailers are also seeing the value of BNPL solutions as a way to increase average order values and conversions, and are seeking partners best placed to offer such a service. 

By partnering with neobanks, retailers risk losing control of their customer journeys. To make matters worse, since many customers will have to open a new bank account on the neobank’s website, conversion rates will be affected. 

Retailers are seeing best results when partnering with whitelabel platforms so they can maintain control and have a choice in lenders to partner with. 

Their disregard for retailers’ needs and their many limiting factors compared to other solutions makes the neobank BNPL offering undesirable at best. 

It begs the question - why would a neobank enter such a competitive, profitable space if it were not to compete and generate profit?

The misconceptions around the motives of neobanks 

It appears they have ample motive to enter the space, albeit not for the most obvious reasons. 

In the wake of the announcement, there has been a PR storm, highlighting how the banks are following current trends in finance and, being banks, can be seen as a more ‘credible’ solution to current market providers of BNPL. 

What makes a lot more sense is neobanks entering a very popular, trending market for marketing purposes. This theory becomes a lot more plausible when you explore the potential outcomes of such a campaign. 

The primary driver has been to get new users on the platform and using their service. If they’re to compete with banking giants, they need to have a competitive user base. 

Generating awareness and raising their profile is certainly one way to do that. Another way would be to offer as many products as possible to create a higher level of engagement. 

The consumers that do opt for neobanks’ BNPL solutions will have to open a bank account and may then explore more of their financial products. 

Eventually, this will result in the banks delivering bigger lender capabilities and provide them with the much-needed credibility in an industry where credibility is fundamental. 

The consequences of an irresolute Revolut 

So, it’s clear that neobanks have an agenda behind their BNPL ventures, but will a reluctance to take the market seriously come to haunt them? 

It’s obvious that BNPL is something that cannot be ignored. It is revolutionising the way consumers are paying for products and, if this growth trend continues, then neobanks will ultimately be left trailing behind.

This gap between them and other providers will only increase in the wake of regulation. It’s currently being discussed across the globe and, when it comes into action, traditional lenders will be the most prepared to adapt. 

This could propel them ahead of the FinTech startups and the neobanks, who won’t be as well versed in regulation as their traditional competitors. 

They may come to regret their decision of using BNPL as a quick win, rather than seeing it as the future of credit. The only way they will be able to get around this quickly is by using a platform that can compete.

How neobanks can enter the BNPL market sustainably 

While their motives are definitely understandable, neobanks need a way of entering the BNPL market that will help them in the long-term – not just the short-term. 

A thorough exploration of BNPL will highlight where current providers are lacking and the unique solutions neobanks can utilise to fill the gaps. 

By using an external, whitelabel platform, they can enter the market at speed and partner with retailers to stay competitive. Being global players, they will also benefit from a BNPL service that can be scaled across any country and channel. In short, it can scale as they do. 

In doing so, neobanks can not only join this hottest of sectors and benefit from the increased noise that has been driven off the back of it but future-proof their strategy and position themselves as competitive providers of BNPL.