When point-of-sale credit provider Klarna brought its solution from Sweden to the United States in 2015, traditional credit card issuers made it clear that they were not fully meeting the needs of merchants and consumers.
The demand for Buy Now, Pay Later (BNPL) services in the United States is increasing as cash-strapped consumers appreciate the opportunity to get instant loans minus any formal credit check – with the option to repay with low fees or no fees in small, quick installments. .
As BNPL giant Affirm prepares for a potentially $ 10 billion IPO, new data from Coresight Research suggests that the average BNPL buyer uses more than one BNPL service, and that users range from Gen Z to Baby Boomers.
The signals indicate that at least part of this growth is at the expense of credit card issuers. Whether consumers are cautious about protecting their traditional credit scores or moving further away from cards, buyers continue to pay off credit card balances with repayment rates at historically low levels, Fitch said last week.
What is not clear is whether US credit card issuers are learning the right lessons from the challenge BNPL lenders pose to their industry.
Friend or enemy?
Capital One announced this month that it will ban BNPL payments on its credit cards, a move aimed at protecting its potential losses from consumers with strapped finances.
But since most BNPL instant loans are tied to customers’ debit cards, Capital One’s decision is not likely to slow the growth of BNPL leaders like Affirm, Afterpay, Klarna, Uplift and many more.
“BNPL came about because no one ever knows exactly what their terms will be with traditional credit cards, and for the most part all BNPL [options] are very transparent in what and when you are going to owe – and for consumers operating in an increasingly e-commerce world with complicated finances, this is what they need, ”said Kristian Thøgersen, North President American ViaBill, a Denmark-based BNPL service that started operations in the United States two years ago.
BNPL’s programs also give merchants much-needed flexibility in the offerings offered to consumers, Thøgersen said.
“Merchants using BNPL are very interested in future options as they move closer to direct financing of purchases, and if you start to see credit card exchanges regulated banks will need to seriously rethink their loyalty programs, which could change. the credit card equation, ”Thøgersen said.
The last time the United States had a Democratic president, merchants got debit card exchange relief from the Durbin Amendment to the Dodd-Frank Act. Retail research firm CMSPI recently said new data suggested a overall overhaul of the exchangers is in order.
So far, the BNPL sphere is unregulated, but there are rumors that BNPL programs – at least in Europe – are having a negative effect on consumer finances. the UK’s premier watchdog group last week called on the government to “fully regulate” BNPL services.
Meanwhile, these services are evolving rapidly. PayPal is experiencing strong growth thanks to its simpler BNPL offerings, and instant credit offers from other providers are evolving into higher-priced purchases, with some repayment terms spanning months.
Williams-Sonoma and its Pottery Barn and West Elm subsidiaries have added Affirm’s BNPL offerings – alongside its co-branded credit cards for every brand issued by Comenity – clearly hoping to capture buyers on all ends. of the income spectrum.
This is not necessarily a new problem for card issuers. Last year at Arizent’s Card Forum in New Orleans, Visa’s chief economist, Wayne Best, said fintechs held nearly 40% of unsecured installment debt in the United States – a big increase from just 1% of fintechs held in 2010.
In addition to being a competitive threat, these lenders also obscure the credit risk of borrowers.
“When you, as a consumer, move a credit card balance… to unsecured installment credit, it doesn’t weigh as heavily on your credit score,” Best said in an interview with Card Forum. “Let’s say I was a near privileged client before; now that has propelled me into a category of choice.
This difference is sufficient to create an invisible risk for issuers, especially since borrowers are facing economic difficulties.
In July, Visa began piloting installment loan programs with U.S. lenders, including Commerce Bank and bank processor TSYS, and Mastercard separately announced in September a partnership with TSYS to create BNPL offerings for credit card issuers. credit.
Follow the money
Unlike Capital One’s defensive move, other traditional card issuers responded to BNPL’s challenge by overlaying their own installment loans over existing credit relationships.
But that’s missing out, according to Brian Riley, director of credit counseling at Mercator Advisory Group.
For example, American Express allows a customer to select a $ 150 purchase from Home Depot and schedule the transaction to run as an installment loan, rather than as part of the revolving process, he said. declared.
“The idea is good, but a little silly. All you had to do in the first place was overpay the minimum amount owed, but people like the feeling of knowing that a transaction has been paid, ”Riley said.
It’s still early days to see where BNPL fits in the long-term market, but banks can’t ignore it, said Jason Pavona, managing director of North American e-commerce at FIS.
“BNPL is really an explosive trend right now, but that’s nothing new – layaway plans have been around since time immemorial. What we’re seeing are important ways for young consumers to manage their money because millennials aren’t as committed to the credit card culture, ”Pavona said.
FIS Worldpay observes similar trends in demand for BNPL in the UK, Australia and Brazil, while highlighting that consumers want more control over how they pay for their individual purchases and that younger consumers are ready. to try new approaches.
“Looking to the future, young consumers like Gen Z are the first mobile-first generation, and here is an unbanked group with no credit that is keen to make purchases. Smart traders are looking at this, and so are banks, ”Pavona said.
Another expert predicts that BNPL will eventually evolve to a traditional lending technology-driven approach, and BNPL’s providers are also expected to consolidate.
“I think BNPL or the installments will be phased into credit cards, which can have both a revolving component and an installment component,” said Ali Raza, senior vice president of FSS Technologies USA.
But it would be a mistake to assume that this market is primarily focused on younger demographics, Visa’s Best said at last year’s Card Forum.
“Everyone thinks it’s just millennials or tech geeks. We went back and looked at who was doing those moves and it was happening in all at-risk bands and at all ages – including baby boomers, ”Best said.