About the Episode

When it comes to the latest digital lending trends, is the rise of “buy now, pay later” (BNPL) loans something that consumer lenders at financial institutions need to worry about?

Another type of consumer credit like payday loans and credit cards, “buy now, pay later” loans offer a convenient, flexible, and often interest-free way to pay back point-of-sale installment loans. 

This form of short-term financing helps some shoppers make big-ticket purchases on the spot that might otherwise be unattainable to them.

Offered at big box retailers (such as Wal-Mart, Target, QVC, and Amazon) as well as by small businesses (like those with virtual storefronts on Etsy) and entrepreneurs (even Airbnb hosts offer the option), “buy now, pay later” loans only require consumers to pay an initial installment upfront with payment of the remaining balance spread out over a short time in set increments.

Listen in as Baker Hill’s consumer lending experts discuss what banks and credit unions need to know about one of the biggest digital lending trends.

FAQS About Banking and “Buy Now Pay Later Loans”

How Big Is This Digital Lending Trend? How Many Consumers Are Using BNPL Loans?

“Buy now, pay later” loans are more than just a passing fad. According to findings by C+ R Research, 45% of the consumers they surveyed said they use BNPL loans at least once a month or more.

In fact, the number this type of installment loans that consumers will take out is estimated to reach 59.3 million during 2022 (BankRate.com). 

How Is Inflation Impacting Consumer Shopping?

Consumers are still shopping, though they’ve now adapted to higher prices and are prioritizing their purchases to make their budgets go further. 

According to the National Retail Federation, core retail sales grew in July 2022 “even as overall sales reported by the Census Bureau remained flat on a monthly basis.”

Who Are Major Players in “Buy Now Pay Later” loans?

Some of the most popular vendors offering BNPL loans include:

  • Affirm
  • Afterpay
  • Final Verdict
  • FuturePay
  • Klarna
  • PayPal (Pay in 4)
  • Perpay
  • Sezzle
  • Splitit
  • Uplift
  • Zebit
  • Zip (formerly Quadpay)


Why a Loan Origination System Is a Critical Part of Digital Transformation


Mitch Woods: Welcome to today’s episode of Lending Made Easy. This is Mitch Woods, and I’ve got Brian Peckinpaugh and David Catalano here with me. 

Today we’re going to talk about one of the most talked about digital lending trends: “buy now, pay later” loans.

When I was just buying a new pair of gym shoes yesterday, I had three or four different options to use “buy now pay later.” They all seemed a little bit easier actually than entering my credit card information on the website.

I started to think about that user experience and wondered: “Should a bank or a credit union be concerned about “buy now, pay later” offers? Are they problematic for consumer lenders? Should they be worried about their consumer or their credit card portfolio?

So that’s really my question for today. 

David, I’ll start off our episode about digital lending trends: Should a banker or credit union be concerned with this influx of “buy now, pay later” as a payment option on all of these websites that we’re seeing day in and day out for online shopping?

David Catalano: I would say if a bank is heavily into credit, debit, or prepaid cards, they should be concerned.

Your experience with the “buy now, pay later” shoe purchase was spot on with respect to what “buy now, pay later” is designed to do. 

It’s meant to provide consumers with seamless purchasing. Its convenience, transparency, and flexibility lead to increased online sales.

It’s built just for those use cases, and it’s growing rapidly. 

There is a 10 to 15 times growth rate over its current volume, and this is from CB insights. I’ve done research on this and pulled some data on digital lending trends like “buy now pay later.”

For “buy now, pay later” loans specifically, it’s expected to top one trillion in sales by 2025.

You may be thinking that’s a big number, but—for comparison—today’s credit debit and prepaid cards are eight trillion in sales. 

“Buy now, pay later” loans are set to be only one trillion by 2025, yet today sales are eight trillion using cards. This is a sign this type of consumer lending is making a pretty good dent in the space.

If you’re a bank or credit union that’s focused on credit debit prepaid cards, then this is one of 2022’s digital lending trends that you need to pay attention to because “buy now, pay later” loans are very much coming for that volume. 

Brian, what are your thoughts?

Bryan Peckinpaugh: My first thought is: I want to know what shoes Mitch bought. I picture him as an Air Max guy. 

But back to digital lending trends and “buy now pay later,” I guess I don’t know. 

Is it a risk to the financial institutions? Sure, it’s a risk in that it’s like a lot of the other fintech startups. “Buy now, pay later” loans are cannibalizing part of the traditional banking business by going after those historical consumer card-type purchases. 

That said, I think they are a fantastic opportunity for financial institutions because part of this is you must consider if we, as the banking community, want all of these transactions. 

I’m going to guarantee you that we probably don’t.

“Buy now, pay later” is not a new concept. There’s been layaway for probably longer than any of us on this podcast has been alive. There are stores that tend to target lower-income families and less financially literate people whom they charge significantly higher interest rates and take advantage of the lack of financial literacy of the general public.

From that perspective, I think it’s a fantastic opportunity. The banking business is built on trust. It is built on the expertise in financial literacy and the place where you can go and have somebody help you through some of the larger purchases in your life and investment decisions in your life and I think this is a growing area to look at from consumer finance behavior. 

A lot of us can get in trouble with credit cards, but you can only get in so much trouble assuming they don’t continue to just forever increase your available credit on your credit card. But, it has a set limit to it—right? 

Where you’re now relying on this multitude of buy now pay later fintechs to potentially keep you outta trouble and that’s not good. That’s not good for their bottom line. They’re not financial services companies. They are transaction companies.

Is there going to be a model in that space where these providers are going to take a customer-centric, customer financial health perspective on it? Or, is it just how much of your credit and future payments can I get? Am I going to try to keep you out of crippling debt?

What is keeping me from turning into a sneakerhead and buying 20 pairs of Air Max at $225 a pop when I only need to buy just one pair of shoes?

Mitch, you mentioned having four or five different options when you were shoe shopping. Were they all talking to each other? Would those lenders be able to see if you had thousands of dollars in shoe debt?

I don’t know, but it makes me think: What does that look like going forward and how might it affect your banking digital transformation if you're a financial institute? 

David Catalano: Thousands of dollars in shoe debt? I could see that being possible, but I think the original question was are digital lending trends like “buy now, pay later” loans taking a bite out of the credit card business? The data would say yes. 

The question is: Is that the type of borrowing we want to grow our business as part of our digital lending process flow? Is that the type of borrower banks and credit unions want?

I guess if you’re in that business and you’ve issued a card to somebody, they were good when you issued it and you’re keeping track of that Then potentially some of that business goes away. You’re in it, and if somebody chooses to buy their sneakers through a “buy now, pay later” option, then that’s you lose on that.

There’s no free lunch. Somebody’s going to pick up this sale. I suggest that these people are making a pretty good dent. 

Bryan Peckinpaugh: No question about it. 

How much do they continue beyond what they can do by linking to another payment provider? What could they do with PayPal, as an example, linked to their financial institution relationship? Do they use that as their primary purchase? Or, do they go with PayPal linked to their credit card because they can get a similar “buy now, pay later” offer? How much does consistency across platforms matter? How do they decide to use one provider over another to buy shoes?

It certainly will take a bite out of profits, but I would rather see financial institutions focus on consumer behaviors over digital lending trends. 

The focus should be on consumer financial literacy. We need to think about it more from the perspective of how do I target that underbanked probably typically young or lower-income individuals and turn them into fully-banked customers because the “buy now, pay later” crowd are probably those who use pre-credit cards.

Maybe I’m younger wanting to buy that, that new pair of Air Maxes. I don’t have a credit card to pay it, but when I go to check out on nike.com, there’s this button to click for a by now pay later provider. 

Hey, this is awesome. I don’t have any credit. I don’t maybe know any better. Let me take advantage of that. 

How, as a financial institution, do we go about attracting those underbanked or non-banked customers that probably are the ones, David, to your point, getting more into that buy now pay later space?

David Catalano: Mm-hmm. It does seem like some of these “buy now, pay later” lenders are offering point-of-sale financing as well. 

Affirm is an example. They make the claim that their proprietary credit underwriting model approves 20% more customers on average than comparable competitor products.

It’ll be interesting to see how a firm’s portfolio handles the next 12 months, 15 months, and 24 months. It’s going to be interesting to see if it’s rigorous and robust enough to make it through that. We’re seeing consumer weakness across the board, and if you’re getting really aggressive with underwriting just to build your portfolio, that doesn’t bode well when the consumer doesn’t do well. We possibly dodging a bullet from our bank side. 

Mitch Woods: Yeah. First of all, they weren’t Air Maxes. I’m a CrossFit guy, so they were some Reebok Nanos the newest ones that just came out.

But, back to the topic of digital lending trends, I think you brought up a really interesting point that a financial institution’s model isn’t transactional. It’s really based on that relationship and building trust.

Do you see this as more and more people are using “buy now, pay later”? Are they taking a little bit of a bite out of that debit card and credit card interchange fee income? Banks and credit unions can tap into some of that data and use it. Then, maybe—in some of their personal credit underwriting—help build some of that financial literacy to use that data that these other companies are collecting for issuing credit and building relationships with underbanked or unbanked clients.

Bryan Peckinpaugh: We should definitely be thinking about it. We talked about AI. That’s where this gets into play. Non-traditional credit decisioning is happening in a lot of instances. This is what allows—as David was mentioning—a company like Affirm to have a differentiator on approvals.

They’re approving on different metrics than a traditional financial institution might. Is it worth exploring? Absolutely. We should certainly be looking at how we capture this and fend off some of the attacks on our traditional markets.

I would just rather see us do it from that perspective of overall financial literacy and overall service of the underbanked and non-banked. 

How do we get our names associated with that initial purchase potential whether that’s partnering with retailers, partnering with fintechs that, that offer more of the transaction process, not the decisioning and eventual finance because you’re right. 

That data is incredibly valuable. Understanding those behaviors and using that to identify future potential profitable banking customers would be awesome to have in our overall data sets. 

David Catalano: I also think that if I’m a banker—like the CEO or COO or chief lending officer—I’d go out and buy a pair of sneakers and use one of these buy now pay later experiences to do it and get a sense of what my bank is competing with.

Bryan Peckinpaugh: Mm-hmm.

David Catalano: Then compare that to what it would take, you know, for a similar interaction at your bank? Maybe it’s using a credit card? It could be as simple as putting the credit card in and buying a second pair of shoes and comparing and contrasting that experience, just see what you’re up against.

Mitch Woods: Yeah. Great discussion, guys. I think there’s a lot that’s going on out there in the marketplace that is really competing against the traditional banking model.

This is—to your point earlier, David—one that’s taking a pretty big bite without people really realizing it. 

This was a great topic today and a great discussion. I appreciate the point of view shared by each of you.

With that, its time to say goodbye for now on this episode of Lending Made Easy about digital lending trends. Tune in next time.