Develop or die, they say.
It’s an extreme statement, somewhat simplified in some ways, but the principle applies to financial services, especially banks.
After all, the most basic banking services – those that have existed for decades, even centuries – are being targeted by digitally savvy upstarts who promise all sorts of benefits, including speed, convenience and, depending on where you look, lower fees and higher prices.
To name just a few examples: Goldman is moving into consumer banking, LendingClub has bought a (digital) bank and there are a large number of FinTechs that offer parts of the banking experience, while Big Tech of course offers small businesses and other credit products.
So the moats are shrinking – but that goes both ways. With the same technological advances and data access that drive these smaller, younger businesses, traditional financial institutions (FIs) can be given the power to compete in new markets with new products and services that appeal to consumers and their wallets.
We are of course talking about Open Banking, which makes it possible to literally design these offers with consumer-friendly data and to put new options in context for the end user at the right time, e.g. the right price.
All of this indicates an existential change for the banks themselves. In a report last year, âWhat is a Bank?â We found that 36.8% of consumers classify banks as institutions that keep money safe, while 34.9% consider them institutions for saving and paying interest on deposits 27.1% describe them as institutions that grant loans and make investments.
Read here: The many answers to “What is a bank?”
Pretty solid definitions.
However, by sticking to these silos, banks are missing out on other revenue streams that are not necessarily tied to these clearly defined activities. By opening up new levels of connectivity, banks can open up new areas of business that are not connected to the traditional … but can cross with them.
Case in point: buy now, pay later, commonly known as BNPL.
The world’s affirms and afterpays have, among other things, increased sales momentum by offering a credit option that is not tied to traditional credit lines (like a bank) or cards. The popular belief is that these installment loans would at least subtract some of the banks’ card lines. Part of the problem was the infrastructure that was required to set up this installment finance.
But now comes the news that Mastercard is making a decisive move into the BNPL space, announcing on Tuesday (Sept. 28) that it is providing banks (and others) with the connectivity they need to bring users their own BNPL plans – at 78 million dealers. As described in this section, the first rollouts will take place in the United States, Australia and the United Kingdom and see the BNPL functionality embedded directly in the payment network across multiple rails. Studies have shown that sales can increase by up to 45% while at the same time the number of abandoned carts decreases by 35%.
Read: Mastercard Installments brings new network of lenders and instant turnkey BNPL to 78 million merchants
Dealing with the top line threat
For banks, BNPL could have been a major threat posed by the BNPL âPureplaysâ. But the fact that stocks like Affirm are down several percentage points as of this writing (a 5 percent drop on Tuesday’s opening for Affirm, similar defaults for others) shows that watchers are aware that the requirements for a the banks have leveled little (and the pureplay trench is not as “trench-y” as some may have thought).
There is another benefit for banks. PYMNTS research has shown that BNPL is particularly attractive to “second chance” consumers who may have less than flawless credit. But the data shows that 65% of these second chance consumers make more than $ 50,000 a year, with 30% making more than $ 100,000. The average second chance consumer is 44 years old and has a FICO score of 662, or just 38 points less than the average âgoodâ credit score. This is encouraging for the banks starting the BNPL offerings, separate from their traditional lines of credit, in order to get those consumers involved in other products and services with good repayment activity with the BNPL loans.
Cross-pollination is good practice for top-line torque and recurring revenue – and given the relatively younger age of BNPL consumers, it also extends its lifetime value. With connectivity through Mastercard’s network effect, banks can actually move forward.