JENS AUDENAERT of Diebold Nixdorf details how banks are responding to the BNPL trends and how they can overpower fintechs in the innovation race, as reported by The Paypers Editor Raluca Ochiana .
THE PAYPERS: The rise of Buy Now Pay Later (BNPL) has proven a boon for many fintechs, with traditional banks lagging and missing out on some of the profits. Why has this been the case?
JENS AUDENAERT: BNPL has been one of the winners coming out of the digital payments acceleration during the pandemic, with massive consumer adoption. BNPL transaction dollar volumes are increasing 12 times faster than any other unsecured lending product and are projected to account for more than a quarter of the unsecured lending market by 2026. The opportunity has almost in its entirety been driven by fintechs – a very crowded space with some standout large players such as Affirm, Klarna, and Afterpay.
Surprisingly, almost no banks have brought their own BNPL offering to market, despite the appeal not only to consumers, but also to the merchants that many banks serve through their merchant acquiring businesses. Fintech innovations like BNPL should come as no surprise, but the fact that traditional banks haven’t been able to jump on the wagon quickly enough should serve as a cautionary tale for them. In this era of rapidly accelerating innovation in the payments space, banks need to reevaluate their strategy on how to stay relevant to consumers and merchants while growing their business through new payment transaction methods (many banks derive north of a third of their revenues from payments).
To a large extent, banks were not necessarily caught off-guard by the rise of BNPL but they did lack the ability to quickly adapt to the emerging trend, given their complicated and outdated legacy technology infrastructure (or that of the processors they work with).
TP: Is there a way for banks to still participate in BNPL? What should their stance be vis-à-vis BNPL fintechs?
JA: Fintechs certainly pose a real and present competitive threat to traditional banks, with companies like Revolut and N26 obtaining full bank licenses. However, fintechs also provide brick-and-mortar banks with partnership opportunities. This, for many banks, is the best path forward to enter the BNPL space – unless they have the technology setup and know-how to orchestrate such a transaction with their own payments platform. As long as banks rely on legacy systems, this coopetition model will continue to be the go-to strategy of providing emerging payment methods to their customers – enabling the financial institution to remain relevant to their customer base albeit while only extracting a small share of the profit pool for those transactions.
TP: What can traditional banks and financial institutions do to not repeat the example of BNPL where the value from financial innovation is being reaped almost exclusively by fintechs?
JA: Banks must untangle themselves from payments technology that has reached its effective end of life. More than 40 per cent of banks are still relying on monolithic legacy payments platforms coded in COBOL. This exposes them to systemic risks related to performance and resilience, inflated costs, inability to keep up with regulatory changes, and a rapidly dwindling talent pool capable of maintaining and changing the codebase. It also prevents them from properly integrating with new systems, and from designing and deploying their own new services quickly. In today’s fast-changing payments landscape, the benefits for banks to replace their payments stack far outweigh the perceived risks of migrating to a new payments engine – especially with more banks adopting a cloud-first strategy. Banks should be mindful though, that when selecting a new payments system, it is one that relies on a cloud-native, modern architecture and that truly provides a future proof solution that can be easily extended and adapted (ideally, by financial institutions’ own engineering resources).
TP: Do you believe traditional banks stand a chance to win this innovation race?
JA: Traditional financial institutions have significant advantages over fintechs in their own right, notably their customer populations and relationships, including historical data and additional services (e.g., mortgage lending). In addition, as opposed to their new fintech competitors, banks are well placed to satisfy the need for a seamless omnichannel payment experience between different payment methods (card, ACH, cheque, and digital payment methods). In other words, with the right strategy and the right infrastructure, banks can give fintechs aspiring to become fully licensed banks a run for their money.
TP: How can your solution, Vynamic® Payments, help financial institutions stay abreast of changing payment trends and consumer expectations?
JA: Payments is in the DNA of Diebold Nixdorf, and with our Vynamic Payments platform, we now have an outstanding digital payments solution for financial institutions, leveraging a truly cloud-native architecture with all the benefits the cloud has to offer (and many of the benefits discussed even before when deployed on-premises). This is exactly the kind of payments platform that allows financial institutions to integrate with any system, and to process any type of payments with any type of authentication. And ‘any’ is the key – in a world where no one can predict what the next major trends will be and which trends will actually win in the long run, a future-proof, modern payments solution must prove itself flexible, adaptable, and extensible.
- Editor’s Note: This interview was first published in Payment Methods Report 2022, the most updated overview of trends and developments in the payment methods space and the innovative technologies that these methods work upon, emerging consumers habits, and strategies on how to win at conversion and retention.