Want to expose yourself to the buy it now and pay later space with less risk? Try this action


Recently, Citizens Financial Group (NYSE: CFG), a large regional bank with $ 187 billion in assets headquartered in Rhode Island, announced that it plans to expand its point of sale, buy it now and pay later (BNPL) relationship with Microsoft (NASDAQ: MSFT). BNPL has been all the rage lately, with companies like To affirm (NASDAQ: AFRM) achieve huge valuations in a very short period of time.

However, being a large regional bank, Citizens’ stocks allow people to gain exposure to the space without the same kind of risk that has led high growth tech stocks to sell off lately. Let’s see how Citizens provides this exposure with more stability.

Build citizens pay

Investors see Citizens as more traditional banking action, not that banking hasn’t gotten much more innovative from a digital banking perspective over the years. The bank has a large portfolio of commercial loans and other commission related activities, such as investment banking and wealth management.

Over the years, Citizens has strived to create a more diverse consumer portfolio that encompasses high yield digital savings accounts, mortgages, home equity, student loans and a BNPL wallet by full growth. Over the long term, Citizens seeks to create a national digital consumer bank that better integrates and markets all of these products together.

Citizens Pay, the BNPL offer and the bank’s point of sale, essentially allows individuals to take out installment loans of 12 to 18 months at zero rate on purchases and to repay them over time. The other benefit of this product is that once a customer makes a purchase on Citizens Pay, there is no additional credit check on future purchases.

Image source: Getty Images.

Citizens has formed key partnerships over the years, and Citizens Pay can be used by many large retailers like Best buy, Walmart, Target, and GameStop. BNPL’s portfolio represents approximately $ 4 billion to $ 5 billion in total loan balances on the balance sheet, and currently shows a good return of 7.15% on the portfolio. During the bank’s third-quarter earnings call, Citizens CEO Bruce Van Saun said BNPL’s balances were up about 40% year-over-year.

With the extended partnership with Microsoft, customers will be able to purchase all Microsoft hardware, such as the new Surface Pro or Xbox, as well as accessories and subscription services, from Microsoft.com using the Citizens Pay platform.

The advantages of being a big bank

If you look at the past month, the fast growing fintech Affirm has been hammered and is down over 31%. Meanwhile, Citizens’ stock has remained stable and is up 35% year-to-date. Since Citizens is a bigger bank that has a lot of other businesses, it will trade much more stable than a stock like Affirm.

Fintechs have been sold widely over the past month as investors worry about the omicron variant and higher inflation, which has led the Federal Reserve to ditch the word “transient” when it comes to inflation. The Fed also appears to be accelerating the reduction in its bond buying program and raising rates in 2022.

The market is concerned that higher rates could cause more BNPL borrowers to default and that higher rates could also hamper consumer demand, especially if the economy continues to struggle. supply chain and labor, or future bottlenecks. In September, Reuters reported that a third of U.S. consumers with a BNPL deal missed one or more payments.

A bank like Citizens with over $ 123 billion in loans is much less concentrated in BNPL. Additionally, the credit quality in Citizens’ BNPL’s portfolio appears to have held up fairly well at the end of the third quarter, with unfunded loans, those for which borrowers have defaulted on payments, and write-offs, debts. unlikely to be recovered, both relative to 2020 levels.

The other great thing about Citizens is that because it’s a bank, it serves as an inflation hedge because it’s asset sensitive. This means that more of the returns on its assets (like loans) will be revalued to a higher level than its liabilities (like deposits) when the Fed raises rates. And Citizens is quite asset sensitive. A gradual 1% hike in the fed funds rate would translate into 5% more net interest income over the next year – the money banks earn on loans and securities after covering their cost of funding and a major revenue driver.

A less risky BNPL game

Ultimately, Citizens belongs to a different class than a company like Affirm. It won’t offer roughly the same upside potential, but it will be more protected against downside. As long as inflation doesn’t get too high, a stock like Citizens will benefit from higher rates.

I also think BNPL could be an interesting client acquisition strategy for citizens if it can use BNPL to reach clients nationwide and then sell other banking products like mortgage or student loan, to these customers. Citizens is still viewed by investors as a traditional bank, but the bank is growing its BNPL portfolio, which is starting to establish itself as a compelling digital retail strategy to differentiate itself from its peers.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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