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Fintech M&A 2021 deal tracker: The summer of buy now, pay later

Financial services heavyweights are waking up to consumer demand for financing at the point of sale, bolstering deal-making targeted at such lending and buy-now, pay-later platforms in August and September.

The financial technology sector saw 43 acquisition announcements in August and 18 in September as of the 15th, according to data compiled by S&P Global Market Intelligence. Five announced deals exceeded $2 billion in deal value, and three of those were targeted at point-of-sale financing lenders: The Goldman Sachs Group Inc.'s $2.23 billion acquisition of home improvement lending platform GreenSky Inc.; PayPal Holdings Inc.'s $2.73 billion acquisition of Japanese BNPL platform Paidy Inc.; and Square Inc.'s $26.9 billion megadeal for Australian buy-now-pay-later giant Afterpay Ltd.

The M&A wave signals a "catch-up" period among financial services companies as they work to buy into or invest in the continued growth of e-commerce, a trend that has sped up even more in the past 18 months, Guggenheim Securities managing director Roshan Punjabi wrote in an email.

"BNPL is now being viewed as 'table stakes' and no longer 'nice to have' in order to compete in the rapidly evolving payments sector," Punjabi wrote.

Banks and fintech incumbents are willing to pay up for exposure to point-of-sale lending, which has grown rapidly during the coronavirus pandemic for several reasons. More spending online placed e-commerce buy-now, pay-later, or BNPL, options in front of more consumers than ever before; consumers without credit cards are embracing the chance to finance purchases; and younger spenders are warier of traditional consumer credit options. PayPal said in July that loan volume for the BNPL product it launched in 2020, Pay in 4, grew 49% to $1.5 billion. Afterpay funded $15.8 billion of transactions in its fiscal 2021, double the previous year. For Goldman Sachs, GreenSky adds yet another facet to its yearslong foray into consumer banking and lending.

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The growth PayPal observed in its BNPL product prompted it to reach for Paidy to expand into Japan, where Paidy is a leading BNPL platform, according to a report by 451 Research, a part of S&P Global Market Intelligence.

Tokyo-based Paidy provides buy now, pay later services to over 700,000 e-commerce merchants in Japan, including Amazon.com Inc. and its counterpart Rakuten Group Inc. The run rate of Paidy's gross merchandise value, or the value of the transactions that run through its platform, is about $1.5 billion in 2021, according to an investor deck.

"It's a way for a bank to deepen the relationship [with] the merchant," said Adam Hughes, the CEO of Amount, which helps lenders adopt BNPL offerings. "We also think that there's customers that want that optionality."

Investors have rewarded BNPL players for scoring large retailer partnerships. When Amazon and Affirm Holdings Inc. announced that Affirm payment plans would be available at checkout, the lender's stock soared more than 46%.

Banks will have to continue evaluating whether to buy versus build to compete with BNPL-branded offerings from the fintechs. Capital One Financial Corp., for instance, will be testing a BNPL product with select merchants later this year.

"It's already in the market, so [if] you're going to spend the next two years doing a large-scale technology program to build it, you're already behind schedule," Hawkins said.

BNPL is a relatively new term coined by the industry, but the concept of installment loans enabling consumers to split payments over time is not. While the fintech specialists in the space started from scratch by developing technology, setting up warehouse funding facilities and building integration with merchants' checkout systems, many banks already had similar offerings within their existing product lines, said Daniela Hawkins, managing principal with Capco's banking and payments practice.

American Express Co. offers a product called Pay It Plan It to its credit card holders, allowing them to designate certain large purchases for interest-free installments. Many consumers have turned to BNPL to skip the hassle of applying for a credit card, something Huntington Bancshares Inc. has tried to address with Standby Cash, which gives consumers a line of credit based on their checking and savings history as opposed to a traditional credit history pull, Hawkins said. Standby Cash credit lines share many characteristics of BNPL loans: They are digital only, offer up to $1,000 and have no interest if repaid in three months.

Potential regulatory risks of BNPL

As the competition becomes fiercer, merchants are gaining more choices of BNPL providers whether they are fintechs or banks, and the economics of the business model may diminish. Merchants typically pay their BNPL partner a flat fee representing a percentage of a consumer's transaction — sometimes as high as 7% — and as merchants gain more negotiating power, they could drive those fees down and cut into the lender's revenue.

On the other hand, if BNPL becomes ubiquitous, persistently high fees could lead to regulatory scrutiny because the credit card processing fees merchants pay card networks are lower, Hawkins said. Visa Inc.'s credit card interchange fee ranges from 1% to under 3%, for example.

Consumer advocates have also criticized the BNPL trend as another entry point into a debt trap. The U.K.'s Financial Conduct Authority said in February that the sector has "significant potential for consumer harm."

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