“The reports of my death are greatly exaggerated.”
- Mark Twain
The press and pundits are sounding the alarm that credit cards are under threat from Buy Now Pay Later (BNPL) programs. Although it makes for great headlines, it is far from likely.
Yes, both are payment options. And, yes, both give consumers a choice. But the use cases for BNPL and credit cards aren’t the same for all individuals, or even for all purchases. When financial institutions assume that there is a one-size-fits-all solution, they often meet the needs of only a small group of customers, alienating a significant portion of the rest. This is where today’s ever-expanding roster of fintechs have found their opportunity with BNPL, capitalizing on consumer demand for timely and flexible payment options at the point of sale. They are also looking to expand into debit and payment – and a full suite of payment products is a greater threat than just BNPL.
In other words, financial institutions shouldn’t worry that BNPL will cannibalize their credit card business. Rather, they should be concerned that these new competitors will provide a more complete payment ecosystem that will threaten their relationship with customers.
At this point in time, credit cards are simply a very convenient and easy-to-use payment vehicle that allows users to spread out payment over time. They offer low minimum payments, long durations, rewards and a single payment (vs. multiple BNPL loans), which is still attractive to a huge audience of consumers seeking these financial benefits.
BNPL, on the other hand, offers different financial benefits to consumers by way of flexibility, immediacy and transparency. While there are multiple business models for BNPL solutions, at the most basic level, BNPL offerings can be broken down into two categories: pay-in-four and installment loans.
Perhaps the simplest and most accessible, pay-in-four BNPL programs tend to meet the needs of those who have the money to pay off their purchases over the short term. The first payment is made at purchase and the remaining three are due in two-week intervals. This option is typically used for smaller dollar transactions, less than $250.
By contrast, longer-term embedded BNPL loans are structured more like traditional installment loan offerings. These loans are more often used for larger purchases (between $250 and $3000) and have nine- to 12-month terms and little or no interest, depending on the customer’s credit worthiness. As such, these BNPL offerings more directly compete with revolving credit card programs with respect to financing costs, term and payment amounts.
Beyond the differences from the customer perspective, it’s important to note the role merchants play in the credit card and BNPL process. For the most part, merchants are not involved in the credit card process unless they offer a card that has special benefits tied to the merchant with respect to financing or rewards. When new financing options are presented during the purchase process, the financing can impact the potential sale in a positive way for the merchant, making it more likely that the purchase will be made, that there will be a greater number of purchases and that the total sales amount will increase. To drive these positive outcomes, the merchant will provide incentives, such as paying the interest or fees. The benefit of BNPL on sales compared to credit cards is still uncertain as well as the long-term differential in costs.
Financial Institutions are better-positioned than non-bank financing providers to help both their customers and their merchant partners make the right choices. It isn’t a matter of preferring one solution but, rather, understanding that providing more choices at the right time that drive incremental sales will not only protect their customer and merchant relationships, but enhance them.