Of those listed – buy-it-now, pay-later (BNPL) plans, digital wallets, pay with points, and cryptocurrency rewards – BNPL, a type of reverse “layaway” approach, could be next big. thing for credit card issuers.
BNPL is a money lending program that allows consumers to receive a product or service and pay for it in installments (usually with a small commission added instead of interest). For many consumers, this is better than the traditional layaway approach, which defers receipt of the product or service until the customer pays the full balance.
Third-party FinTech companies are leading the BNPL movement. And it’s becoming a crowded space where companies including PayPal Credit, Afterpay, Affirm, Klarna, Zip Pay, Quadpay, Uplift, Perpay, Sezzle, Zebit and Splitit are competing aggressively.
FinTechs partner with retailers to deliver the plans to consumers at the point of sale online through the participating retailer’s e-commerce website or, in many cases, offline through the BNPL company’s app. The app creates a digital card that customers can add to their digital wallet (Apple Pay, Google Pay, or Samsung Pay, for example) for convenience.
Retailers have offered deferred payments since the mid-1800s, but BNPL plans, such as those in vogue today, likely took off in the 1980s and 1990s when department stores began issuing cards. private label credit. Around 2012, the first FinTech startup, Affirm, dubbed the latest iteration of installment financing. Afterpay, Klarna and Sezzle followed a few years later.
Advantages of buy now – pay later
Consumers flock to BNPL because it’s a faster, more transparent and more convenient way to access credit. It helps consumers secure low prices for big-ticket items like travel and meets their growing desire for more flexible spending options.
Additionally, when consumers make BNPL purchases using a credit card that is part of a rewards program, they may earn miles, points, or cash back in addition to deferred payments which may remain interest-free if they pay off their credit card every month.
Most BNPL companies collect funding fees (ranging from 2% to 8%) from the merchant. However, they may also charge consumers fees on larger purchases (travel included) depending on the buyer’s credit score and other factors. They also typically generate revenue and late fees charged to consumers who fail to meet repayment terms.
And despite the high cost of participating in BNPL programs, merchants are buying into the BNPL trend because, as BNPL Afterpay explains, it drives incremental sales, increases average order value, and attracts new customers.
Research on the state of loyalty confirms some of this data. A BNPL option at checkout increases conversion rates by 20-30% and increases average ticket sales by 30-50%, the report says.
The opportunity to buy now, pay later for credit card issuers
BNPL is snowballing in popularity. Analysts expect this short-term point-of-sale financing to grow 181% by 2024,4 and the Federal Reserve Bank of Kansas City, citing data from Accenture, says “the number of BNPL users in the United States have grown by more than 300% per year since 2018, reaching forty-five million active users in 2021.5
Amex Trendex data shows that millennials, a customer segment highly sought after by credit card issuers, are primarily driving the trend. 54% are interested in using a BNPL plan to travel and 62% are interested in a buy it now, pay later offer that comes with their credit card.6
Because interest in BNPL is so strong, it’s a natural progression for credit card issuers to offer BNPL plans that mirror (and enhance) the programs offered by BNPL FinTechs. BNPL programs are still lending, and credit card issuers have been in the lending business for far longer than FinTechs.
Credit card issuers have a lot to gain by integrating BNPL into their rewards programs. It’s a way to further engage the 43% of 18-31 year olds who have at least one rewards credit card7 (and who are the age group most likely to choose BNPL over a credit card to travel) and potentially attract more than the remaining 57% to join a rewards program.
“There are multiple advantages for a credit card issuer to offer a BNPL option, especially for travel. Credit card issuers owe it to their members to respond to the changing landscape of customer preferences, and BNPL is one of the many ways we can meet their needs,” said Cindy Smith, Vice President of AmexTravel.
Credit card issuers could renegotiate their fee structure with retailers replacing third-party company BNPL in the purchase finance food chain. They can offer merchants the benefits of immediate payment and additional sales, increased order size, and the boon of new customers that come with BNPL programs.
The competition is launched
Increased competition can also be a compelling argument for credit card issuers to invest in BNPL. Tech companies are beginning to encroach on the most lucrative businesses of banks (the major credit card issuers).
“As more customers choose fintechs for simplicity, efficiency and lower costs, many tech companies are expanding banking-like services to include payments, savings and investments,” RBC reports. Capital Markets.
Rewards programs had been a way for credit card issuers to differentiate themselves from BNPL lenders. However, a growing number of BNPL FinTechs have added rewards programs. BNPL Klarna, for example, launched a rewards program in 2020 called Vibe. When consumers pay for online purchases with Klarna, they earn points which they can redeem for rewards such as gift cards from Klarna partners. Sound familiar?
Digital wallets are one way for credit card issuers to participate in the mobile payment trend. However, Apple is working on a program that allows its Apple Pay digital wallet users to pay for any purchase in installments over time.
The new program, Apple Pay Later, would likely use the consumer’s existing line of credit, usually a credit card, to fund the installments. This effectively converts what could have become a revolving loan (the type provided by credit card issuers) into a BNPL loan.
How issuers get a slice of the BNPL pie
With market share under threat, credit card issuers have been eager to expand their BNPL offerings. American Express, Chase, and Citibank have launched and expanded BNPL programs where cardholders can split larger purchases into payments for a flat monthly fee and no interest charges. Other major banks and payment networks have announced that they are also exploring proprietary BNPL programs.
Credit card issuers can also overcome FinTech companies’ apparent advantage over banks – integration with their retailers’ e-commerce sites, which enables a BNPL option at checkout.
Banks already have an internal option offering the same functionality. Credit card issuers can leverage their loyalty technology partners to provide a BNPL payment option at checkout on the issuer’s travel booking platform, where it is easier to reach consumers and where the turnout is higher.
Additionally, offering BNPL through the travel platform, where the issuer is both the merchant and the financier, means increased bookings and booking values that benefit issuers at both ends of the transaction. So far, American Express has led the pack here, with its “Pay It, Plan It” program integrated with flight and hotel checkout on AmexTravel.
Keeping the BNPL transaction and account service in-house within a travel rewards program also protects the issuer’s brand. BNPL companies are at their best at the point of sale, but some lose interest when flights are canceled or delayed, resulting in additional charges.10
Although credit card issuers generally perform a more thorough credit check on potential credit card program members, they may consider a soft check (as some BNPL companies do) in exchange for some sort of provisional membership.
Once the consumer has demonstrated appropriate behavior by repaying the short-term loan, issuers could offer the more traditional revolving line of credit, which comes with access to the issuer’s rewards program and other advantages.
Bringing BNPL into the fold
“Buy now, pay later” financing is a payment juggernaut that sits well in the wheelhouse of the credit card issuer.
It can be implemented seamlessly into travel rewards programs through the issuer’s travel booking platform and has the potential to be replicated in spend categories other than travel.
BNPL has all the attributes of a burgeoning new business model: strong consumer demand, explosive growth, immediate revenue potential and low cost of implementation (credit card issuers already have the administrative infrastructure in place). square).
It could also be a trend that credit card issuers can’t afford to ignore.