Incumbents at the gate of ‘buy now, pay later’

Hi Fintech fam,

“Buy now, pay later” has emerged as the defining fintech trend of the back half of this year. This week’s newsletter stays on that theme.

First, Owen Walker in London caught up with Mastercard’s president of the European region to talk about how the payments giant is trying to help traditional lenders get in on the BNPL craze. We also have a Q&A with the co-founder of Khatabook, a B2B fintech trying to modernise cash collection for millions of small business owners in India that have relied on an informal version of BNPL for years.

Analysts and commentators, including FT’s Alphaville, have raised concerns about the viability of the BNPL business model, but whether or not the fintech names dominating the space today stick around long term, the trend has already changed the conversations around consumer finance in ways that are unlikely to be reversed.

How many times do you think BNPL will be mentioned by US bank executives on earnings calls this week? Place your bets in my inbox: imani.moise@ft.com.

“If you can’t beat them — join them”, appears to be Mastercard’s strategy when it comes to BNPL.

The 55-year-old company is synonymous with credit cards, but its business is best described as the plumbing that supports much of the global payments system. Now, Mastercard is building out infrastructure that enables incumbent lenders to offer BNPL services — a payment model that offers interest-free credit for online purchases and debt is paid off in short-term instalments.

The new programme, Mastercard Installments, will be offered in the US, Australia and the UK from next year. So far, the payments giant has signed up as partners some of the largest names in US store-based credit card space including Synchrony and Barclays US. Mastercard is also partnering with fintechs like SoFi, which is looking to build out its own super app.

Right now, the BNPL is dominated by fintech upstarts. But as established players step into the burgeoning market, they hope to be the ones who benefit most as regulators get to grips with the sector.

“We want to be the grown-ups in the room,” Mark Barnett, Mastercard’s president for Europe, told FintechFT.

The market has boomed in recent years as BNPL has become the payment method of choice for Generation Z. In the US, BNPL lending grew tenfold between 2019 to 2020, from $3bn to $39bn, according to consultants at Mercator Advisory Group, who predict the US market will grow to $100bn by 2024.

Europeans and Australians are equally hooked on the instant gratification BNPL offers. Which?, a UK consumer group, estimates a third of British shoppers have used the payment model.   

The popularity of BNPL has turbocharged the valuations of start-ups specialising in this area. Sweden’s Klarna recently closed a fundraising round valuing the company at $45.6bn, making it more valuable than Barclays, the bank that first introduced credit cards to Britain.

The success of BNPL has prompted some in the industry to question whether the new trend spells the end of credit cards, as younger consumers turn their backs on the decidedly 20th-century technology.

It is no surprise, therefore, that Mastercard has followed the likes of Goldman Sachs and Apple, along with fintechs Revolut and Monzo, in joining the BNPL bandwagon.

But as BNPL comes of age, its providers are having to answer tough questions about whether their business practices are creating a generation addicted to credit, and the implications of stiff penalties for missed payments. Regulators have voiced their concern.

A February review of unsecured credit commissioned by the UK’s Financial Conduct Authority concluded that BNPL was a “very urgent” matter due to the potential levels of indebtedness and lack of regulatory oversight of much of the market.

This is where Mastercard believes more traditional financial groups have an advantage over the start-ups that have so far dominated the BNPL space.

“It’s going to get more regulated and it should be more regulated,” Barnett said of BNPL. “Nobody wants over-indebted consumers. The people who are best able to make sure consumers are able to repay are banks.”

Barnett said Mastercard views BNPL in much the same way it views cryptocurrencies: as a disruptive force in which it wants to be involved to help the market mature. (Owen Walker)

Quick Fire Q&A

Every fortnight we ask a fast-growing fintech to introduce themselves and explain what makes them stand out in a crowded industry.

Today’s start-up hails from Bengaluru, India, where Khatabook co-founder Ravish Naresh set out to modernise the financial infrastructure used by India’s 63.4m micro, small and medium-sized enterprise (MSME) owners. The workflows of many Indian MSMEs are still paper-based because of a lack of relevant digital tools. In three years, the Khatabook team has grown to a team of over 280 employees who were brought together by a common understanding of the difficulty of running a small business. Everyone at the company had a family member running a small business who struggled with managing their finances, especially during the pandemic. Now, the company boasts over 10m monthly active MSMEs from almost every district of India, representing the largest MSME network in the country.

How did you get started? The Indian MSME segment relies heavily on sales on credit, which means purchase now, pay later. We started our journey with the Khatabook app by digitising bahi khata, a red notebook ledger that every MSME in India carries for recording sales on credit, pending payments and collections. Addressing unique business behaviour to MSMEs, we provided solutions for manual errors related to data entry and calculations, lack of real-time visibility of business transactions and data loss due to physical handling of books.

How much money have you raised so far? Khatabook has raised close to $200m with a valuation now close to $600m. Major investors are Tribe Capital, Moore Strategic Ventures (MSV) along with Alkeon Capital and continued investment participation from internal investors B Capital Group, Sequoia Capital, Tencent, RTP Global, Unilever Ventures, and Better Capital.

What do you sell, and who do you sell it to? We started with a digital ledger app for MSMEs with financial management functionality and an option to automate payment collection reminders for customers. The app also enables merchants to accept payments online. The user feedback suggested that this particular feature made the cash collection cycle three times faster for merchants. We expanded our portfolio with other apps including Pagarkhata for staff and salary management, and Biz Analyst by Khatabook to provide real-time business analytics on the phone. We are now focused on building financial service disbursement on our platform by digitally fostering lending, payment and deposit-related efficiencies in the ecosystem.

So how do you make money? We are in a pre-revenue phase. Growth is going to be our primary focus at the moment. Having said that, we have kicked off pilots around premium service offerings on Khatabook and Pagarkhata platforms. BizAnalyst by Khatabook is a paid-for solution. We will gradually roll out value-added services and freemium versions for monetisation.

What makes you so special and why can’t incumbent finance firms do what you’re doing? Rather than expecting users to change their behaviour to adopt digital solutions, we built tech as per the users’ requirements. While we want our users to digitise their offline workflows, we are mindful not to change the style of offline bookkeeping. Simplicity is a guideline for product development at Khatabook. We also realised that language inclusion is another major factor for scaling the product for the diverse user base of India. Early in our product development journey, we introduced 13 Indian languages. Cashbook by Khatabook is prevalent in many emerging markets outside India. It is available in Urdu and Arabic with a right-to-left app layout. User empathy has been a significant contributor for us in achieving growth.

Join us in partnership with ETNO for our Tech & Politics Forum on November 29 where industry CEOs, policymakers and investors will gather to debate the new transatlantic tech playbook, the infrastructure investment challenge, the role of cloud and data services and more. Register free for your digital pass today.

Fintech fascination

Pressure builds on Apple’s payments franchise Traditional finance firms and smaller technology companies are increasingly taking aim at Apple’s share of interchange fees. The technology giant is fighting a court order that would allow app developers to bypass Apple’s in-app payment infrastructure with external links, even as some app developers prepare to roll out alternatives the day the injunction takes effect. Banks are also pushing for changes in the way ApplePay payments are processed, which would also reduce Apple’s cut of the fees, The Wall Street Journal reported.

Fintech and Big Tech back down Last week UK fintech Monzo said it had withdrawn its application for a US banking licence after regulators informed the company it was unlikely to be approved. The digital bank will redirect its American ambitions to “build and scale” its “early-stage product offer in the US through existing partners” and redirect capital that would have been needed for a US banking licence into its UK operation. Earlier this month, The Wall Street Journal reported that Google was also backpedalling on plans to delve deeper into the US banking market.

‘Fat finger’ errors expose vulnerability in crypto market When DeversiFi mistakenly sent $24m to an ethereum miner a few weeks ago, it highlighted how easily digital currency platforms could be rocked by the same manual errors that have plagued finance firms for decades. Although the firm had few formal options to recoup the payment, the exchange was able to get its money back over a handshake agreement which crypto advocates say is a sign of the culture of integrity within the DeFi market. Still, recent high-profile mistaken payments and attempts to recover them have made some institutional investors wary of the space and raised questions over the true anonymity of the platforms.