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McKinsey & Company | Aug 17, 2021

buy now pay later - Take home now, pay later with no interest fees

Financing at the point of sale may be a small share of unsecured lending in the United States today, but it’s growing fast. Banks seeking long-term growth should explore market entry, and merchants should reassess their financing offers.

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Point-of-sale (POS) financing services in the United States have grown significantly over the past 24 months, especially since the onset of COVID-19. Trends fueling growth include digitization, rising merchant adoption, increasing repeat usage among younger consumers, and an expanding set of players targeting lending at point of sale, a service also known as “buy now, pay later.”

McKinsey buy now pay later - Take home now, pay later with no interest fees

Thus far, fintechs have taken the lead, to the point of diverting $8 billion to $10 billion in annual revenues away from banks, according to McKinsey’s Consumer Lending Pools data. In our view, only a few banks are responding fast enough and boldly enough to compete. Banks that underestimate the threat may see continued loss in share and could lose out on participating in a growing value pool and gaining share among younger and new-to-credit customers, as banks in Australia and China did when facing a similar situation. To avoid that outcome, US banks need to understand the landscape for POS financing and choose from among the emerging models.

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Our annual POS Financing Survey shows that US consumers are getting used to seeking merchant-subsidized credit at point of sale: about 60 percent of consumers say they are likely to use POS financing over the next six to 12 months.

about 60 percent of consumers say they are likely to use POS financing over the next six to 12 months.

Fintechs are capturing almost all the value being created in POS financing because banks have been slow to respond. Consequently, banks have lost about $8 billion to $10 billion in annual revenues to fintechs. Far worse for banks, they are losing access to an acquisition channel with potential to serve highly engaged younger consumers.

Five distinct offerings with integration across the purchase journey

The growth in POS financing for consumers involves five distinct sets of providers and models, each with varying strategies and value propositions (Exhibit 2). 1 Understanding these models gives a sense of the segments they target, the merchant and consumer needs they address, and business models banks and traditional lenders are competing with.

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Integrated shopping apps

The most prevalent misconception across banks and traditional players is that shopping apps offering “buy now, pay later” (BNPL) solutions are pure financing offerings. While that may be true for the smaller players, the leading Pay in 4 providers are building integrated shopping platforms that engage consumers through the entire purchase journey, from prepurchase to post-purchase.

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