Lending Briefing: Could we see more BNPL consolidation this year?

Given the growth and interest in the space, companies have already been looking to get a piece of the BNPL pie. Last year, we saw Square buy Afterpay in an all-stock deal valued at $29 billion - the largest M&A deal of the year in US fintech. PayPal’s BNPL product Pay in 4 will be joined by an acquisition of Japanese BNPL Paidy in a $2.7 billion deal.

And banks are getting in on this, too. Goldman Sachs acquired BNPL firm GreenSky for $2.24 billion, and will integrate it with Marcus by Goldman Sachs, its consumer-facing business.

As fintechs mature in their niche markets – providing specialist products, establishing wider customer bases and developing their brands – larger players might continue to see this as an opportunity and go for it. 

And this could mean bigger fintechs buying smaller ones, too. Since we’ve been going down M&A memory lane, let’s remember that consumer fintechs are becoming strategic buyers themselves. Digital lender Oportun bought banking application Hello Digit for $211.1 million, and neobank MoneyLion acquired API builder Even Financial for $440 million.

Plus, the recent IPO rush could allow more fintechs to leverage public equity to pursue M&A deals. Public markets have been thrashing many fintech companies, but some fintechs have seen growing valuations. There’s a financial incentive to use their higher multiples to acquire a lower-valued target – for example, Oportun used around $98.5 million in stock and $112.6 million in cash to buy Hello Digit. 

This could also pave the way for bigger BNPL players like Affirm to absorb the smaller folks. After all, it is getting pretty crowded on that checkout screen, and big BNPL platforms can only grow so much organically through merchant partnerships.

“There’s limited real estate for all these BNPL platforms trying to get integrated into merchants,” Alex Johnson, director of fintech research for Cornerstone Advisors, told The Financial Brand. “There are not many ‘blue ocean’ opportunities left.”

These constraints might lead bigger players to look for new avenues of growth, and acquisitions tick many of these boxes. But they’re not the only way forward.

Take a look at Stripe and Klarna, who engineered a growth strategy in an ‘I’ll scratch your back if you scratch mine’ sort of way. 

The two fintechs formed a strategic partnership at the end of last year where both companies can expand their product offerings – Stripe adds flexible payment options to its repertoire, while Klarna gets access to new markets and customers. 

In any case, given the attention this space is getting, it’s likely we’re going to see more strategic activity and consolidation this year.

Chart of the week

It seems like online isn’t gonna cut it anymore. People want finance at their fingertips- - literally.

According to a recent survey by the consulting firm West Monroe, half of small-business owners want to apply for a loan or account on a mobile app, compared to the third that opted for online experiences. 

“Historically, banks have been trying to serve small-business customers using technology, operating models and credit policies more aligned with larger commercial customers,” said Roger Taylor, a director in the financial services practice at West Monroe. “Small-business customers recognize this, and it frustrates them.”

Quote of the week

Building on last week’s briefing on the evolving credit score landscape, I wrote a more in-depth article on fintechs with alternative methodologies to FICO that want to help more people build credit. But one important thing to keep in mind in this conversation is that at the end of the day, we’re talking about data and algorithms measuring people’s lives. 

Kathy Wood, a mathematician who worked on such algorithms on Wall Street, raised the issue of ethics and over-reliance on mathematical models used in financial services in her book Weapons of Math Destruction.

Here’s an excerpt from a chapter that explores the credit industry, an important reminder that for all the advancements in technology, it’s still people at the other end. 

“When automatic systems sift through our data to size us up for an e-score, they naturally project the past into the future. As in recidivism sentencing models and predatory loan algorithms, the poor are expected to remain poor forever and are treated accordingly – denied opportunities, jailed more often, and gouged for services and loans. It’s inexorable, often hidden and beyond appeal, and unfair. 

Yet we can’t count on automatic systems to address the issue. For all of their startling power, machines cannot yet make adjustments for fairness, at least not by themselves. Sifting through data and judging what is fair is utterly foreign to them and enormously complicated. Only human beings can impose that constraint.”

What we’re reading 

• (Fin)Tech for good: how innovative financial services solutions are improving financial inclusion (Maddyness)
• Experian’s Future of Fraud 2022 Forecast (BusinessWire)
• Customers Bank teams with fintech on small-business loan software (American Banker)
• What is paycheck-linked lending? (Argyle)
• A blog on Kard, a “rewards-as-a-service” fintech that allows card issuers to embed rewards programs (underscore)
• They promised quick and easy PPP loans. Often, they only delivered hassle and heartache. (ProPublica)

What we’re writing 

• From one idea to 2 million applications: TomoCredit wants to change the credit score game
• How fintechs like Aquaoso help banks assess climate risks in their lending portfolios
• Bankchain Briefing: Highlights from CoinDesk’s Annual Crypto Review
• Tearsheet’s 2021 guide for marketers: Gens under the lens
• What JPMorgan is doing with that $12 billion tech spend