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Credit unions are understandably motivated to create their own BNPL alternatives to address member needs, avoid disintermediation, and generate revenue with a member-friendly model.
PSCU, a CUNA associate business member at the premier level, is developing such a credit union-centric offering. It’s scheduled to enter pilot phase by year end preceding an early 2022 general launch.
A key difference to the PSCU model is that it does not require merchant integration; it can be made available to all cardholders by a credit union choosing to offer the service.
“It’s not merchant-dependent. Members can make a purchase, planned or unplanned, and later through the digital experience decide to break it up,” says Jeremiah Lotz, PSCU’s managing vice president of digital experience & payments. “Or they can go into the purchase knowing they have that choice.
“From a PSCU perspective, our goal is to give the flexibility to the credit union to create and customize the solution,” he continues.
Participating credit unions can elect to enable only certain purchase sizes or merchant categories, assess a one-time fee or specified interest rate, and determine the range of allowable installments.
Credit unions also have the latitude to brand the product as they wish. PSCU is calling it “Installment Payment Solution,” but each credit union may craft the marketing message to its own member base.
“We see this as an initial opportunity to step into the space but also to evolve as consumer expectations change,” says Lotz. “We’re more worried about disintermediation than cannibalization.”
Those consumer expectations are likely to evolve as BNPL goes further mainstream, product features are tweaked, and regulators have their inevitable say.
As for the “too good to be true” aspect SELCO raises, let’s consider the underreported downsides of BNPL, including the fact that it can function as an interest-free loan—until it doesn’t.
A missed payment often results in a significant penalty fee, as well as the imposition of interest charges and/or fixed processing fees on remaining installments.
It’s worth noting that in BNPL, a “missed payment” is rarely the result of a forgetful borrower but rather a nonsufficient funds (NSF) rejection at the time of auto-debit.
This can trigger NSF events at the credit union as well, particularly because BNPL auto debits are often scheduled to coincide with the bi-weekly or monthly influx of a paycheck.
The Consumer Financial Protection Bureau has begun to express interest in BNPL’s disclosure and fee implications. Some providers have responded by pulling back from the “free upfront, until you miss a payment” revenue model.
OpenPay, a leader in the Australian BNPL market that recently entered the U.S., has taken a different approach: It applies a nominal processing fee to each transaction.
It will be interesting to see if this transparent pricing approach gains traction without the “always free to the consumer” hook.
Financial regulators in the U.K., where BNPL gained mass market acceptance earlier than the U.S., have closely analyzed these products following widespread reports that many consumers used them last holiday season to outspend their means, later missing payments and incurring penalty fees.
In mid-October, market leader Klarna preemptively revamped its terms and conditions, clearly spelling out that BNPL is a “credit offering” and more visible disclosing its penalty fees.
Curiously, Klarna also added a “pay now” button to its checkout screen, seemingly overriding the “pay later” feature core to its value proposition.
A subtler and potentially more troubling issue for both credit unions and their members is the loss of visibility into future obligations. Consumers who become acclimated to using BNPL on a regular basis could lose track of upcoming obligations, which may be spread across multiple providers.
“Safe to spend” personal financial management functionality may also lack access to this information, as do credit reporting agencies, complicating decisioning for existing loan products.
Most BNPL repayment periods extend for no more than 90 to 120 days. But there is nothing to prevent them from running longer or, if the provider is willing to accept the risk, for larger ticket items.
The model is already applied to larger, longer-term (and often offline) purchases like medical procedures and home fitness equipment.
As SELCO’s primer points out, BNPL “is especially handy if you have an urgent purchase (like medical equipment not covered by insurance) that you may not be able to afford right now.”
However, the credit union also cautions it can encourage impulse purchases, and McKinsey’s research finds the most common use cases include apparel and beauty products.
Nonetheless, consumer behavior is strongly indicating market demand for an installment payment product in the spirit of BNPL.
It seems natural for credit unions to participate in the evolution of this space—even if purely though member education—to both foster financial prudence and to preserve their role as the hub of members’ financial lives.
Pagel advises credit unions to examine their checking data. “See who’s making payments to point-of-sale lenders and market other products to them. These are credit-hungry consumers.”
GLEN SARVADY is managing principal at 154 Advisors.