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BirdsEye View

 BPNL took the country – indeed, the world – by a storm.  It is one of the big winners of the COVID era, where so many consumers were forced to buy essentials online vs. in stores.  One can hardly buy anything online without being offered the beautiful option of paying for the purchase in four equal installments.  This occurs regardless to the amount of the purchase, and the interest rate is buried in the payment itself.

New research confirms that this BNPL option is now a viable and effective competitor to the bank card program.  While consumers still rely on credit cards for many uses, many are drawn to the convenience and user experience that Buy Now, Pay Later offers, and might even use it to replace the plastic in their wallets.

Use of BNPL surged over the last 18 months, especially among younger people.  The convenience, the smooth experience, the avoidance of using credit ratings to buy things and the newly found affordability of more expensive products for their convenience all proved irresistibly attractive to a broad swath of consumers.

And according to a new report from Marqeta, the exponential growth of BNPL shows no sign of abating.  Marqeta surveyed 3,500 people in July, using Propeller Research to reach people in the United States, United Kingdom and Australia. All three countries have all seen rapid adoption of BNPL usage.

Among the findings:

• BPNL usage increased 27% more consumers said they’ve used a BNPL service this year compared to those surveyed in 2020; 

• 78% of BNPL users surveyed said they plan to use it more in the future; 

• 59% of consumers who have used a BNPL solution said they find it easier to manage multiple payment plans than their credit card statements (AB:  this is a surprise, which requires further study and explanation).

This explosive growth of firms in this space has been evident in recent months. Apple engaged Affirm in a partnership, and Klarna raised more than $600 million from Softbank. Affirm’s stock price has nearly doubled over the last six months, and Square purchased in August BNPL firm Afterpay for $29 billion. More recently, Goldman Sachs announced it is acquiring home improvement BNPL lender GreenSky for $2.2 billion.

So where does all this leave the old stalwart, the credit card? According to the report, the credit card is still king, but that could change if BNPL continues its dramatic rise. 78% of American consumers reported using credit cards and 70% reporting using them at least once a week. With the pandemic bringing on new financial distress, credit cards were also a reliable source of stability for consumers.

Over half of consumers said they increased their credit card usage during the pandemic and 65% said they used credit cards to help make ends meet. Credit cards also provided additional layers of support for users, with over two-thirds of consumers saying cash back has been their most valuable reward.

According to the report, the biggest benefits of credit cards were being able to make a purchase without the funds necessary (44%) and helping consumers not have to carry physical cash (39%). Americans were the most attracted to the prospect of credit card rewards — which the rest of the world didn’t see as appealing in such high numbers.

Interestingly, Americans also answered in much higher numbers than other parts of the world that building a good credit score was a significant factor in the usage of credit cards.

Another good sign for the credit card industry: Among 18-25-year-olds that were surveyed, 90% of Australians in this age group as well as 87% of Americans, and 82% of U.K. respondents in this same demographic said they had their first credit card by the age of 21. Attracting younger customers does not yet, seem to a problem for credit card issuers.

Several trends in the survey also point to BNPL gaining in popularity on credit cards, coupled with increasing dissatisfaction with credit cards. When asked what the biggest deterrent to acquiring a credit card was, responses included:

• 52% of global respondents said high interest rates were a factor

• 46% said they didn’t like incurring debt

• 33% were unhappy with the high cost of carrying a credit balance and annual account fees.

• 59% pf BPNL users say they would be happy using the product to replace their credit cards

I find it fascinating that BPNL consumers do not realize there often is an implied finance charge to the product, nor do they consider the accounting and financial implications of carrying multiple BNPL balances a burden or an encouragement to increase their personal debt.

It is a concern that BPNL users consider using the product for long-term financing needs and a replacement to credit cards.  This is especially true f among younger consumers.

BNPL services consistently got higher marks in user experience, and the majority of those surveyed reported that managing their BNPL plans is easier than managing credit card statements. This shift means that consumers now have greater expectations on how the user experience should be and will be more demanding of their credit card providers.

Credit card issuer now have a golden opportunity to upgrade their user experience and wrap BNPL features into their cards.  VISA has already figured it out and is on the verge of offering the feature to its card issuers, and Mastercard isn’t far behind.

There are many implications to community banks who are also card issuers.  Among them:

• Consider offering BPNL within your card program and outside it

• Do not build your BPNL tool; partner with an established provider.  If JPMorgan Chase isn’t large enough to do their own, neither are you

• Focus on customer experience and differentiation tools

• Simplicity and speed are key

• There IS an opportunity cost for being a “fast follower”

In summary, our industry is looking for ways to increase its consumer loan portfolios beyond the mortgage product.  BNPL currently cannibalizes other consumer credit products that are traditionally the banks’ domain.  Find ways to incorporate this consumer-appealing feature into your product offering and hop on this runaway train before it runs its course.