Before credit cards permeated the mass market, these programs were a popular way for Americans to pay for large-ticket items.
A department store would reserve an item on the back shelf for one of its customers (holiday gifts were a common target). The buyer would make payments over time—presumably a little each payday—and once the balance was covered they took the goods home.
Fast forward to 2021, where a high-tech version of the same model has become the hottest item in e-commerce.
Everyone wants a piece of the Buy Now Pay Later (BNPL) market. Valuations of stand-alone players such as Klarna and Afterpay have skyrocketed, Amazon has partnered with major player Affirm to move even further into the space, and incumbents like PSCU and Mastercard are racing to develop offerings for use by their financial institution customers.
Modern-day BNPL differs from legacy layaway plans in a few key respects. They have mainly built their name in support of online purchases—the resulting gains in “cart conversion” are the key selling point for e-commerce merchants.
Installments are almost always auto-debited, typically via automated clearinghouse or debit card. And in perhaps the biggest difference, the consumer receives their goods upfront upon making an initial partial payment at the point of sale.
It’s hard to overcome the appeal of instant gratification.
BNPL first gained traction in Australia, the European Union, and the U.K., markets where credit card debt is less common. In the U.S. it’s being marketed as an alternative to revolving debt, providing a clearer path to full repayment, often in the form of a merchant-funded, interest-free loan.
Given the tendency for younger American consumers to favor debit over credit cards, as well as their gravitation toward e-commerce, many financial services experts view BNPL as a significant threat to outstanding card balances.
As of Sept. 30, U.S. consumer card debt is down 13% from the high set 18 months earlier and has receded to levels commonly seen four to five years ago.
But is BNPL really the culprit? Let’s take an objective look at the rapidly evolving space, including the perspectives of some supporting players, to better understand the risks and opportunities the model presents for credit unions’ bottom lines, as well as their members.
Financial services experts view BNPL as a significant threat to outstanding card balances.
What’s the catch?
"They’re so easy to use, they almost seem too good to be true. Is there a catch?”
SELCO Community Credit Union’s newsletter article on BNPL opens by precisely stating the question members are hopefully asking. The $2.4 billion asset credit union in Eugene, Ore., then provides an objective and informative overview of the service’s pros and cons.
Other credit unions have taken similar valuable steps toward member education.
A recent McKinsey study found that 30% of consumers opting for BNPL would either have made a smaller purchase or not completed the transaction at all absent this financing option.
This is essentially the same value proposition underpinning merchants’ credit card acceptance, and the additional cart conversion, particularly at online shopping sites, has succeeded in convincing merchants to fund such programs at prices exceeding card interchange.
According to a TransUnion study, however, BNPL activity is not necessarily coming at the expense of credit card transactions.
“A large portion would have used a debit card or cash, or not made the purchase at all,” explains Liz Pagel, TransUnion’s senior vice president of consumer lending.
Both McKinsey and TransUnion research found that roughly one-third of BNPL purchases would otherwise have gone to credit cards.
“We found those who applied for BNPL actually had more credit cards and more credit available to them” than the average consumer, Pagel says. “The point-of-sale loan appealed to them. They liked the idea of splitting the payments, and the interest-rate benefit.”
A savvy consumer could achieve much the same effect by adhering to a strict card repayment schedule, but this would require a lot of discipline and no revolving balance.
As Pagel sees it, BNPL is “growing the overall credit pie; it’s not a zero-sum game.”
She says BNPL applicants continue be more “credit active” than other consumers, both in using existing cards and applying for new ones. “This is just another tool available to them.”
TransUnion’s data also debunks the notion that BNPL is purely a young person’s product. “Twenty-one percent of applicants are over 50, so they’re not ignoring it,” Pagel says.
The online experience is the primary driver behind BNPL’s high profile. By embedding the service into their site navigation, merchants can deliver a “splash screen” making consumers aware of the offer at any point in the shopping experience, potentially inducing them to spend more—and to opt for a payment instrument other than a credit card.
The opportunity for such site integration and prominent preemptive offers is why Amazon’s recent partnership with Affirm drew so much attention.
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