How Splitit's new CEO plans to make BNPL more bank-friendly

Buy now/pay later loans are a hot product category, but the fintechs that have dominated the market face a squeeze play from a potential government crackdown and new competition from incumbent card issuers.

This is the market that Nandan Sheth is stepping into as the new CEO of Splitit. Sheth is bringing his experience working with merchants on payments technology to his new job, as well as a less adversarial tone toward the financial establishment than some other BNPL fintechs take.

"We're not going to be a vanity brand," said Sheth. "We're bringing 'installments as a service.' "

Sheth has worked as both a fintech entrepreneur and payment industry executive. Most recently, Sheth was Fiserv's head of global digital commerce and head of the bank technology company's Carat business, which manages omnichannel commerce for multinational merchants.

Sheth was previously president and co-founder of Acculynk, which launched in 2008 and was acquired by First Data in 2017 (before Fiserv acquired First Data in 2019). Sheth was also co-founder of Harbor Payments, which American Express purchased in 2006.

As traditional financial institutions launch BNPL products and regulatory pressure builds on fintech-driven point of sale credit, Sheth is attempting to forge a path that works with traditional financial firms to offer BNPL. Splitit wants to operate mostly in the background as a white label provider, which differs from other BNPL fintechs that heavily rely on their own branding and promotion.

"We want to work hand-in-hand with issuers and networks to offer a contemporary experience for installments at checkout," Sheth said. Sheth, who is based in Atlanta, became CEO of Splitit at the end of February, replacing John Harper, Splitit's interim CEO since August 2021. Harper, who replaced Brad Paterson, will remain at Splitit through a transition period.

Splitit accesses unused consumer credit to fund BNPL. There's about $4 trillion available on credit cards, according to the Federal Reserve. Splitit tries to "unlock" that credit by turning it into smaller installment payments without interest, with Splitit's revenue coming from merchant fees. It's a different approach than most other BNPL lenders, which open new credit relationships with consumers, with interest charges depending on the lender and purchase.

Splitit uses partnerships with Visa, Mastercard, Discover and UnionPay to avoid consumer registrations and other logins before or at checkout. The appeal for the credit card companies is more transactions and easier processing, Sheth said.

"If you can embed a new payment capability in the existing flow at a merchant, the likelihood of success is greater," he said. "Merchants are looking for a cost-efficient method of payment and are looking to manage risk."

At Acculynk, Sheth helped lead the movement to bring PIN-debit payments to the internet, and this experience could help link BNPL to debit cards.

He "knows how all the moving parts fit together to build value," said Richard Crone, a payment consultant in San Mateo, California. "This working knowledge is in short supply in the BNPL market."

Especially beneficial is Nandan’s ability to improve Splitit’s merchant acceptance and the infrastructure required to minimize fraud and address consumer protections in advance of pending CFPB regulation, Crone said.

"What sets him apart is tolerance for integrating a fast-paced startup into a legacy business, especially attractive to any potential merger and acquisition candidates for Splitit," Crone said.

Sheth also worked on Clover, First Data's point of sale system. Clover was a key part of First Data's transformation under CEO Frank Bisignano, who upgraded the traditional payment processor into more of a merchant technology company. Carat and Clover both stress a single portal to manage multiple transaction types, and a mix of digital payments and other merchant services — a stress on simplicity and merchant control that Sheth has brought to his new position at Splitit.

In his previous jobs "we worked with different legacy BNPL providers and saw some things that drove me to this opportunity at Splitit," Sheth said. The prevailing BNPL model, driven mostly by fintechs, is to create new loans for every installment plan, according to Sheth. "That could be burdensome for consumers, especially when these BNPL plans hit credit reports."

By operating as a white-label provider and working with existing credit relationships, the options for a credit card or BNPL payment are still there at the point of sale, but for the consumer and the merchant it flows through the same relationship and brand, Sheth said.

"I felt that having a variety of brands at checkout creates a 'Nascar' experience for consumers that creates more friction than is expected with a modern mobile commerce experience," Sheth said of multiple branded payment options at the point of sale that to him resemble the cacophony of ads on a race car. That causes "disenfranchisement," he said.

Higher inflation and general economic pressure will bring more consumers to BNPL loans, and this in turn will pressure BNPL lenders to provide an easy checkout experience that's also safe economically for the users.

By enabling BNPL through card rails, Splitit hopes to benefit from the expansion of traditional banks such as U.S. Bancorp, Capital One and JPMorgan Chase into BNPL. The large banks will place pressure on smaller issuers that have thus far remained on the sidelines.

"As you think about the high cost of capital due to inflation, there will be more pressure on the BNPL industry," Sheth said. "We would like to see more issuers being relevant at the merchant checkout for point of stale installments."

The increased competition from traditional issuers is pushing diversification among fintech-led BNPL lenders which are trying to differentiate ahead of potential consolidation. Klarna, for example, is pushing open banking as a way to help its merchants and consumers connect payment credentials to other financial products. Affirm has inked a deal with Amazon and added a debit card. And Block's acquisition of Afterpay, which closed in February, allowing Afterpay's BNPL product to be part of Block's "two-sided" market serving both consumers and merchants.

While Splitit pursues issuers and the BNPL fintechs add financial services, the Consumer Financial Protection Bureau is moving toward a potential regulatory crackdown on BNPL lending. Following pressure on BNPL in the U.K. and other global markets, the CFPB has ordered fintech BNPL providers Affirm, Klaran, PayPal, Afterpay and Zip to provide information that will allow the agency to measure how BNPL impacts consumer debt — and how BNPL lenders use data.

While BNPL is positioned as an alternative to credit card debt, regulators have grown concerned that the use of installment lending can have adverse impacts on consumers. Australia's Department of the Treasury, for example, found 30% of the revenue from BNPL comes from debt that's used for consumption rather than wealth creation. And in the U.S., about 66% of BNPL borrowers have a credit card balance that's at lesta 75% of their limit, according to Research and Markets.

"The CFPB doesn't move quickly, but there will be some kind of statement coming," said Ginger Schmeltzer, a strategic advisor for retail banking and payments at Aite-Novarica in Decatur, Georgia.

Along with the credit bureaus adding installment lending performance to consumer credit reports, there is an increasing environment of scrutiny around BNPL lending, Schmeltzer said.

"Anything like a [more robust] credit check would create more steps at checkout. And an impact on a credit score could prevent consumers from setting up installments."

Splitit's model, which relies on accessing existing pre-approved credit card balances, should allow it to meet any pending CFPB or other regulatory action, Sheth contends. "We are not issuing new credit," he said.