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Does “buy now pay later” represent a threat to traditional credit and debit cards?

The ‘buy now, pay later’ movement, may disrupt the credit cards industry with the rising surge in the search for liquidity in a pandemic-stricken world. A form of installment financing, buy now pay later, is witnessing increasing popularity with the millennial consumer. Consumers are being attracted to BNPL programs in growing numbers with 60% of consumers claiming they have used such a service. Research further shows that BNPL has grown by an impressive 85% over the past 18 months. One of the greatest draws of BNPL is the ease of use, with 55% of users saying so. 16% of millennial shoppers are using BNPL with college-educated, higher earners being more receptive to BNPL.

So, what exactly is BNPL?

It works exactly as the name suggests. Also known as point-of-sale credit, this scheme allows consumers to repay within a delay period without incurring penal interest. It is also a form of credit that operates across a network of sellers. Much like any other form of credit, how a consumer pays back can impact credit scores.

BNPL has also become popular because of the rising digital revolution in the payments space as new payment alternatives become more acceptable by consumers. Recent developments in this space include major players like Amazon, PayPal, and Apple announcing BNPL offerings.

Research suggests that we can expect to see consumers spending $100 billion in retail purchases using BNPL programs in 2021—up from $24 billion in 2020, and $20 billion in 2019.

Consumers are seeking merchant-subsidized credit at the point of sale. While the incremental impact of these solutions varies according to the merchant size and category, BNPL seems good for merchants too. BNPL solutions seem to deliver increasing cart conversions and attract younger and new customers.

BNPL – threat or opportunity?

While BNPL presents itself as a great option for consumers, it comes with some risks. An inability to check credit history could lead to lenders underestimating borrowers’ debt levels. The cost of borrowing for the consumers can also spiral if they haven’t read the terms and conditions carefully.

Since these terms and conditions vary across providers, there can be potential pitfalls hidden in the fine print in the form of high late fee charges or extra charges for rescheduling payments.

Analysts also warn that BNPL users may find themselves turning to credit cards or debit cards to repay their BNPL debt. This is especially so since the propensity for spontaneous purchases is higher with BNPL given the simplicity of the application process and cheaper immediate costs of borrowing compared to credit cards. This is an important consideration point when U.S. household debt rose to its highest dollar amount in the past 14 years.

That apart, BNPL schemes usually only offer payment flexibility to consumers at lower interests. While the consumer spends a fair amount of money on BNPL, (since research shows that it is not just the consumers with low credit scores using these schemes), they do not receive any of the additional benefits and value-added services that credit cards and debit cards provide.

The road ahead for traditional debit and credit cards

The flexibility and the low/no interest rates offered by BNPL schemes are the key features attracting consumers. But we cannot claim that BNPL will kill the credit or the debit card market especially since BNPL schemes are essentially loans that are not backed by any security. This segment is still not under the stringent regulatory frameworks but is slowly drawing attention as regulators feel that payment innovation cannot ignore credit risk.

It’s true that BNPL schemes have made the field tougher for debit and credit cards issuers. However, BNPL providers still must work on building acceptance networks and enrolling merchants for which they need a large customer base. The BNPL model also demands a higher cost from merchants as compared to traditional credit cards and means higher risk in the absence of data-backed risk models.

We also cannot ignore the fact that credit card interchange is cheaper as compared to BNPL transactions. Usually, BNPL merchant fees tend to be very high and can impact merchants dearly. According to the Federal Reserve, “The average interchange fee per covered transaction processed over dual-message, and single-message networks was $0.22 and $0.24.” For Visa dual message transactions, the effective rate amounted to 1.44%. The rule of thumb is that U.S. credit interchange is about 2.25%. The math fails to add up in favour of BNPL here. Further, in most sophisticated geographies such as the U.S., regulatory entities such as the Federal Reserve have no control over fintech BNPL companies making it harder to address consumer complaints.

Industry analysts also are coming around to believe that the BNPL model may eventually end up catering much more to the non-carded customer base. To that extent, the method could eventually expand the market base there rather than threaten the credit and debit card market. However, the growing adoption of this model shows that credit and debit card providers now need to launch stronger, more value-driven, personalized, contextual, and agile programs to prevent customers from getting drawn towards BNPL providers.

Delivering exceptional customer experience now becomes more essential for card providers. This must include providing market-driven payment options, connecting relationships with major networks to provide a system of record and transaction processing services to open-loop credit card programs, and capably responding to evolving customer needs with agility.

The rise of BNPL can also be attributed to the fact that now payments have become an important touchpoint in any selling proposition. Giving customers the option to pay for a purchase over a period of time also allows marketers to develop a unique selling point and influence the consumers’ buying decisions.

Card program managers thus need robust digital credit card management platforms to quickly launch and manage various types of prepaid programs. With data-backed insights into demographic needs and behaviors, program managers should nimbly be able to deliver relevant, targeted & useful incentives in their credit card programs to attract and retain their customer base.

In Conclusion

Heavy and exceptional customization capabilities will become a valuable weapon in the program managers’ arsenal to differentiate themselves from their competitors and ensure customer stickiness.

So, while BNPL will continue to see adoption, it is unlikely to cannibalize the cards market. However, it will be imperative to up the credit card program management game and recalibrate rewards programs according to the changing needs and demands of the consumer.

Connect with us to see how your credit card programs can become more resilient in the face of a rapidly evolving consumer-led payments landscape.


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