Member Exclusive, Payments

Payments Briefing: Behind Walmart’s growing interest in BNPL

  • This week, we talk about Walmart’s growing interest in BNPL and financial services.
  • We also discuss the growing demand for digital, non-bank payouts, and how merchants can keep up with consumers’ changing needs.
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Payments Briefing: Behind Walmart’s growing interest in BNPL

CNBC recently reported that a Walmart-backed fintech startup called ‘One’ is planning to launch a BNPL service in 2023, which shoppers will be able to use at Walmart’s website and physical stores, as well as at other retailers.

The installment payment option will be added alongside the checking accounts, savings accounts, and debit cards that are already offered by One.

One operates as an independent firm, but is majority-owned by Walmart, and aims to develop affordable financial solutions targeting Walmart’s customers and employees.

One is led by Omer Ismail, who previously led Goldman Sachs’ consumer bank. Its leadership also includes some other former Goldman executives.

Walmart's investment in One is not a surprising step for the retail giant. Being the country’s largest private employer and its biggest grocer, it has, for a long time, offered financial services at many of its stores. It has a money center where customers can go for banking-related services, such as printing checks, sending or receiving money, or loading prepaid debit cards.

Many of these services are geared towards lower-income families that don’t have relationships with a traditional bank or don’t have the credit history to qualify for credit cards. These consumers may be attracted to a flexible payment option like BNPL, particularly in the current environment of high inflation and a challenging macroeconomic climate.

Additionally, Walmart CEO Doug McMillon spoke recently about even wealthier consumers being strongly affected by inflation, which could mean that they may also be looking towards BNPL as an alternative payment option.

Of course, this is not Walmart’s first venture into BNPL. Walmart currently offers BNPL loans through a partnership with Affirm that dates back to 2019. At this point in time, it’s unclear how the new BNPL product from One will affect the existing offering with Affirm.

Would Walmart still maintain the Affirm partnership? We don’t know the answer to that yet. What we do know is that One’s new product could allow Walmart to grab a bigger slice of the US BNPL market. Since Walmart has majority ownership of One, that means it could keep a bigger share of the income from transactions, rather than having to share revenues with a provider like Affirm.

Affirm’s shares also dipped following the news of One’s BNPL offering.

One’s installment plan could encourage spending at Walmart from customers who want more payment flexibility. It might also help attract new customers who were curious about BNPL, but didn’t really trust fintech startups and wanted the backing of a more established brand like Walmart.

So far this holiday season, despite the inflation, consumers have been making record levels of purchases, thanks in part to BNPL apps. BNPL orders jumped 85% in the period between Thanksgiving and Cyber Monday, compared with a week before, according to data from Adobe.

Over 10% of Black Friday online shoppers used BNPL this year, up from around 8% last year, and around 4% in 2020, according to another study by PYMNTS.

Despite the currently high demand for BNPL, Walmart would also have to contend with the stronger regulatory oversight that’s likely to be implemented in the US, which could affect BNPL growth.

Walmart would be opening itself up to potential complications tied to concerns that BNPL can lead to overspending and add to consumer debt, particularly among younger shoppers, who may be more likely to miss payments and be generally less aware of the financial risks associated with BNPL.

What’s driving the adoption of digital payouts?

Nearly nine in ten Americans are now using some form of digital payments. From ecommerce websites, mobile payment apps, digital wallets, and checkouts using a QR code, or P2P payments, to paying with a smile — digital methods in payments are gaining momentum across the globe.

When it comes to receiving funds, consumers want convenient and speedy digital payouts while also getting more choice. For merchants, offering digital payout options saves money and increases customer satisfaction. According to data from Carat by Fiserv, digital payouts are up to 60% cheaper than traditional checks and wires, and drive up to a 25% reduction in payment status inquiries.

Historically, banks have been considered the safe haven to park capital and receive funds. That is why receiving a payout to a bank account is a familiar and trusted experience that consumers are comfortable with – especially among older generations who have relied on bank accounts to manage inflows and outflows for most of their lives. However, many younger consumers, who tend to be more familiar with digital wallets, increasingly prefer non-bank payouts.

Additionally, more than two-thirds of Americans expect to have a digital wallet within two years, and it’s likely that many will hold multiple wallets.

Driven by digital wallets from Apple Pay, Google Pay, PayPal, and Venmo, and payment options provided by the likes of Square, with integration of “pay later” and BNPL functionalities, a growing number of consumers, and consequently businesses, vendors, and merchants are no longer inclined to use cash.

The question then becomes, how can merchants keep up with customers’ increasingly dynamic needs?

“Understanding who your customers are and how they like to interact is imperative. For instance, how a consumer uses an insurance claim is often very different from how a delivery driver might use the money earned from a day’s work,” Naomi Donaldson, Director of Digital Payouts at Fiserv, told Tearsheet.

As US consumers are increasing the use of digital payments in a variety of ways, businesses looking to compete in a digital-first world must look for opportunities to integrate customer choices to create loyalty-building experiences.

Along with convenience, digital payouts bring their fair share of challenges for payment processors as well, including establishing all the connection points to various payout destinations. 

Moreover, fraud remains a key challenge facing the payments industry, and poses a threat to consumer trust in digital payments. With consumers becoming more reliant on digital experiences, it has become essential to implement security practices throughout the digital payout process that keep merchants and businesses a step ahead of fraudsters and their tactics.

As the interest in digital payments continues to grow, including in relatively newer areas like BNPL and cryptocurrency, it is presumed that the use of cash is unlikely to ever return to its pre-pandemic levels. However, cash will most likely continue to have its place in payments. 

Consumers aren’t entirely comfortable with getting rid of cash and want the flexibility of paying with cash as an option. Some economists suggest that an impending recession may drive a certain percentage of consumers back towards cash-based spending as they look to manage their budgets.

However, digital payments and digital payouts create efficiencies for consumers and businesses alike in a world that has transformed how to operate and deliver value to customers, amp up the user experience, and bolster global money movement across borders, according to Donaldson.

Today, payment channels tend to evolve based on consumer spending habits determined by the economic climate. Meeting customers’ ever-evolving needs and riding the next wave of growth for businesses requires a new approach, driven by consumer convenience. User expectations around digital payout features and integration indicate that providers who incorporate these features in their offerings are likely to stand out and thrive in 2023.

Highlights from our recent coverage

How financial institutions can design a balanced BNPL solution

Current BNPL solutions have been better at facilitating the "buy now" part than fulfilling the "pay later" aspect. Financial institutions have access to valuable insights that they can use to better understand consumers and tailor BNPL solutions to their specific needs.

Zeroing in on the Gen Z consumer with Katapult

In this bonus Steez feature, host Rebecca Cohen speaks with Orlando Zayas, CEO of Katapult, an alternative to BNPL that offers lease-to-own options to non-prime consumers with limited access to credit.

The Big Bank Theory Conference 2022: All session videos

Tearsheet's Big Bank Theory Conference brings together the most innovative players changing the face of the financial institution. Here are the videos from this year's conference, held online in December.

What we're reading

  • Visa proposes automatic payments using Ethereum layer 2 system StarkNet (CoinDesk)
  • JPMorgan invests in Indian payments provider ISG (Finextra)
  • PayPal working with crypto wallet MetaMask to offer easier way to buy crypto (CoinDesk)
  • HSBC partners with Extend to enable virtual cards for US SMBs (Finextra)
  • Visa to invest $1 billion in Africa over the next five years (TechCrunch)
  • Checkout.com slashes internal valuation from $40 billion to $11 billion (FT)

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