(Photo by GREG BAKER / AFP)

Embedded finance ensures BNPL is not making banks irrelevant

The buy now pay later (BNPL) is becoming quite a revolution around the world today. The easy, no-frills concept that allows shoppers to pay for their items over a period of instalments without the need of a credit card or even a credit check, and interest-free most times, is not only increasing consumer purchase power but also starting to have an impact on banks.

Traditionally, any form of purchase over instalments would require credit cards. And to get a credit card, one would need to apply from a bank and have their credit score checked before being given access to one. While credit cards offer the flexibility of a lower repayment over longer periods with zero or minimal interest, many fail to get access to them due to banking credit scores.

However, BNPL is now changing that. Today, almost anyone with a bank account and online banking capabilities can have access to purchase over instalments. For banks, BNPL has marked a significant concern for their growth, especially with the younger generation preferring a no-frills and seamless approach to banking and finance.

With the BNPL market expected to reach US$20.4 billion by 2028, banks are also now looking into tapping the market by partnering with fintech and non-fintech companies in offering such services. In fact, the online segment is anticipated to register the highest growth with numerous e-commerce companies partnering with BNPL platforms.

The role of embedded finance in BNPL

For banks, embedded finance is now a priority. More banks are looking at how they can inject traditional financial services such as payment capabilities, or loan applications within a non-banking application.

Today, several lifestyle apps are doing this. Banking-as-a-Service (BaaS) are enabling non-financial applications to consume these services and make the most out of them. With both BaaS and embedded finance interrelated, banking information services are slowly being integrated and exposed into the economy.


(Source – FIS)

According to Kanv Pandit, Group Managing Director, Asia Pacific, Banking Solutions at FIS, the move towards embedded finance is a stampede as banks are looking to partner with both fintech and non-fintech companies to become their embedded finance provider.

“Consumers are driving this. They want to have an integrated experience. They prefer discreet banking. Be it BNPL or protection on products, there are now more opportunities to consume more simple payments compared to complex products. Banks and financial firms have noticed this,” said Kanv.

For example, banks are bringing their capabilities and partnering with non-financial providers like a messaging application or a transport app to embed a landing capability in that application.

Kanv also pointed out that the BNPL and embedded finance trend in APAC matches and, in some cases, exceed what’s happening in the US and Europe. From a tech standpoint, Kanv explained that APAC has an advantage as there is fewer legacy and more contemporary platforms compare to the US and Europe. While they have trouble integrating with fintech, it’s much easier in APAC.

Why didn’t banks initially tap into BNPL?

Kanv acknowledges that while BNPL is proving to be successful, the opportunity factor for banks to tap into segment was minimal in the past. Constraints of technology and the ability to integrate with various merchants are some of the reasons that hindered banks from looking into BNPL capabilities in the past.

Before the rise of BNPL and fintech, banks were dominating the industry with credit cards. And credit cards enabled them to have all the credit information of customers and enabled them to offer services based on these data.

However, with BNPL being enabled at a real-time point of purchase, credit decisions are now very different compared to BNPL providers today. Banks could not look at instant credit decisions due to the heavy and traditional regulations there were bounded to.

Despite this, Kanv said the industry is seeing a lot of collaboration happening now. Both BNPL and banks are coming together for a favourable situation for both.

“BNPL can tap into the banking system. BNPL has technology and credit models that make it attractive to banks to partner with it. At the same time, both are also learning the ropes to do it independently. While they are collaborating, both are also looking to launch their own offering in the market. It’s a great place for both of them now, especially with a phenomenal amount of investments pouring in,” said Kanv.

At the same time, regulators are also being supportive as it represents an expansion of financial service access and opening up a credit opportunity for those who couldn’t seek it in the past.

(Photo by Saeed KHAN / AFP)

The future of banking

Interestingly, Kanv also said that he is watching for examples of reverse embedded finance. Reverse embedded finance would see financial institutions offer non-financial services. He believes that banks would be trying to flip this and make an opportunity out of it.

With so many different points of payments being made, it would be interesting to see how banks can do this on their own platform. Simply because banks have a lot of experience when it comes to superiority and maturity which they can bring in.

For example, loyalty programs are something banks and credit card issuers have been offering for decades. This mature capability is lacking in fintech, and banks can use reverse embedded finance there.

With that said, Kanv believes that the traditional consumer pool of banking will shrink. They will be looking to tap into unaddressed pools to make sure they can sustain and grow. There is no denying that banks will still be relevant in the future.

“Embedded finance and BaaS are tools but not the ultimate ways of banks having a critical role. Banks will tap into technology like never before. They are participating actively in the economy and continue to be relevant in the future. They will evolve, they have shown it in the past and are more than ready to face up to the challenge,” concluded Kanv.