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CITIZENS SAYS BUY NOW/PAY LATER LENDING IS BEST WHEN IT STAYS IN ITS LANE

By  John Adams
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June 07, 2022, 11:55 a.m. EDT 6 Min Read
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As regulatory and economic troubles build for BNPL lenders, Citizens is focusing
on traditional installment lending items like home improvement and electronics.
Bloomberg
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When the news started tickling out that buy now/pay later lending was being used
at gas stations and supermarkets, it was a signal for Citizens Financial Group
to go on offense by espousing its more traditional view of BNPL.

"We've logically stayed away from some of those categories. It's a risk for
consumers," said Eric Schuppenhauer, head of consumer lending and national
banking for Citizens. "If BNPL goes to where it's just a bunch of layered
purchases on top of each other, it's looking like the types of debt that people
were using BNPL to avoid in the first place."

Fintech-led BNPL is suffering from both regulatory pressure from a Consumer
Financial Protection Bureau investigation and economic heat from falling
valuations over concerns that an economic slowdown could cause more people to
default on BNPL loans. Regulated banks that have experience in BNPL lending,
like Citizens, and firms that work with banks to power BNPL, like Splitit and
equipifi, see a chance to draw a distinction. 



As interest rates rise, nonbank lenders that use debt facilities for lending
will see significant impact to their unit economics, said Bryce Deeney,
equipifi's CEO.  "As new regulation is brought in, third-party fintechs will
have to adhere to these changes that level the playing field for traditional
lenders to compete," Deeney said. 



Given its experience, which predates some of the fintech-led BNPL lenders,
Citizens is an exception to bank-led installment lending. While most banks are
just starting to warm up to the product, Citizens has offered a form of BNPL for
years, starting with a program in 2015 to finance purchases of iPhones and other
Apple hardware.

Citizens has since focused on higher-ticket purchases for BNPL, forging retail
partnerships that cover categories such as home furnishings, big box retail,
specialty retail, fitness, travel and entertainment, and home improvement.  

"These are bigger-purchase items with emblematic brands that are really
important in the lives of consumers," Schuppenhauer said, adding the Office of
the Comptroller of the Currency and the Federal Trade Commission have regulated
Citizens' BNPL service since it launched. "They've kept a critical eye on us,"
he said. 

Citizens, of Providence, Rhode Island, more recently added a virtual line of
credit for BNPL, enabling repeat purchases without a new application or managing
multiple loans. Called Citizens Pay, the product works for purchases with
partners such as Microsoft, Best Buy and GameStop. Citizens is also expanding
its BNPL product to health care and is recruiting more electronics retailers.  

"We're trying to do more than just put a button on a site," Schuppenhauer said. 

To bring more banks into BNPL, Mastercard and Visa have both introduced services
designed to make it easier for banks to adopt and scale the product. However,
smaller banks have been slower to sign on, leaving bank-supported BNPL mostly to
larger financial institutions.  

Both fintechs and banks are getting added competition from Apple, which on
Monday announced Apple Pay Later. The product uses enrolled consumer credentials
to present Apple's BNPL option at the point of sale without requiring
integration work by the merchant.  Large payment technology companies PayPal and
Block also offer BNPL. 

Banks have a chance to compete by pitching fiscal responsibility, according to
Brian Riley, director of Mercator Advisory Group's credit advisory service. 

"Responsible lending will help build loan books," Riley said. "The 'approve
almost everyone' model does not serve any of the parties involved."

The BNPL firm Splitit, which partners with financial institutions to power BNPL
by accessing consumers' unused credit card balances, argues banks are
well-positioned to offer BNPL, to a point. Banks can improve their position by
accessing tools such as application programming interfaces to reach multiple
merchants faster, thus matching the fintech BNPL providers' scale. 

"Merchants want a ubiquitous solution that creates the least amount of friction
for their consumers, that is priced fairly," said Nanden Sheth, Splitit's CEO.
It's hard for a single-bank BNPL solution to scale in a market dominated by
agile fintechs that have the ability to support any consumer that passes their
underwriting criteria, he said. 

"Additionally, merchants do not want the complexity of supporting multiple
standalone bank products," Sheth said. 

The traditional financial firms that are playing a role in BNPL are doing so
largely through partnerships and acquisitions, according to Ralph Dangelmeier,
CEO of the payments processor BlueSnap.

There are some exceptions such as JPMorgan Case, which is building its own
product. That suggests a wave of mergers and acquisitions is coming as banks try
to scale quickly, according to Dangelmeier.

"As regulation gets stricter, any smaller players that offer a competitive
advantage in BNPL compliance will have a leg up," Dangelmeier said. "I would
expect fintechs that start to do better in those spaces to be appealing
acquisition targets." 

The regulatory and economic concerns for fintech BNPL lenders are increasing as
more borrowers use the product, driving delinquency risk. Through May, 43% of
Americans had used BNPL in 2022, up 12 percentage points from 2021, according to
LendingTree, which also reports 42% have had to pay late fees and 46% were "very
confident" they could pay off their BNPL loan. 

This follows earlier research from Australia's Department of the Treasury that
found 30% of BNPL revenue comes from debt that's used to fund consumption rather
than wealth creation. The Australian Parliament found BNPL is a factor in 20% of
consumer insolvencies, compared with 3% for credit cards, and in the the U.S.
66% of BNPL users have a credit card balance that's 75% of their limit or more
when making their first BNPL purchase, according to Research and Markets. 

As the pressure mounts, fintech BNPL providers may promote their products for
more purchase types, such as the aforementioned supermarket purchases, as the
economy cools. That furthers the risk for BNPL fintechs, Dangelmeier said. 

In recent months, valuations for BNPL fintechs have dropped significantly, often
by more than double-digit percentages. Klarna has fired about 10% of its
workforce. 

This late payment performance data from consumers — and a cost of capital that's
more expensive for fintechs and less expensive for banks — creates mounting
pressure on fintech BNPL firms, Sheth said. That is driving the declining
valuations and layoffs. "The business model for legacy BNPL is broken," he
said. 

Among BNPL fintechs, Klarna, which has positioned itself as an alternative to
payment cards, recently introduced a plastic Visa debit card allowing customers
to shop at stores or websites through interest-free installment loans. 

In an email to American Banker on the subject of competing with bank-supported
BNPL, a Klarna spokesperson said the firm's interest-free BNPL products are a
fairer and more sustainable way to access credit than bank-supported BNPL. 

"The vast majority of our customers pay responsibly, which is why 99% of our
lending is repaid and our losses are 30-40% lower than the credit card industry
standard, and we restrict the use of our services if a payment is missed to
prevent debt from accumulating," the Klarna spokesperson said, adding that
Klarna conducts "strict eligibility checks on each purchase."


John Adams
, American Banker
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