Merge Ahead – What Happens When Buy Now, Pay Later and the Credit Card Industry Intersect?

Accelerating growth by working together

The BNPL industry, while similar in theory to credit cards, has provided a unique twist on credit – it’s immediate, it’s typically for a single purchase (traditional BNPL products don’t offer an open-ended credit limit) and there is usually a set installment plan for repayments (most often three or four).

But even that is changing – as more BNPL providers enter the growing market space, they are changing the rules (and the products offered) at a rapid pace. As providers and products continue to evolve, the wants and needs of customers are coming sharply into focus – for example, some consumers have expressed frustration at the one-and-done aspect of installment plans at checkout, and would rather have a revolving, renewable credit limit, which certain providers now offer.

BNPL in its current state began as a 21^st century, usually internet-based alternative to credit cards, allowing consumers to purchase items at point of sale (either online or in a physical store location) via installment plans. Australia is often credited with being the pioneer of BNPL, with giants like AfterPay and OpenPay, but Sweden-based Klarna brought the movement to Europe and other companies began offering BNPL services across the globe in quick succession. As more regulatory oversight comes into play and more widely varied BNPL products emerge on the scene, industry analysts and other providers may increasingly look to how Australian products react to shifts in trends as an indicator for how the evolution of the market will play out globally.

It’s clear the fintech buzz-term of the decade has to be Buy Now, Pay Later – it’s impossible to get away from. But as BNPL continues to grow and evolve so rapidly, where does that leave the credit card industry?

BNPL Crashes Credit Cards’ Party

The impact of the meteoric rise of BNPL has not gone unnoticed by the credit card industry. Consumers, especially the younger generation, have been actively looking for alternatives to high-interest credit cards, forcing traditional lenders to be more competitive if they want to stay relevant. Sixty-two percent of current BNPL customers think that the payment concept could completely replace their credit cards¹, with just over a third of users in the U.S. (36%) being repeat customers – utilizing BNPL services once a month or more². As of April 2021, about 5.8 million Australians have a BNPL account, while 38 percent of people in Singapore utilize BNPL for frequent purchases.³

And why is BNPL so popular? 47% of users take advantage of BNPL plans because they want to avoid paying credit card interest. Other reasons included their friends using BNPL, credit cards being maxed out, and feeling more responsible when they break large purchases into smaller payments². In Europe, “BNPL options are projected to see the largest gains in usage [in e-commerce] in the next three years and almost double their share until 2024, accounting for almost 14% of the spending on e-commerce in Europe.”

With BNPL on its rapid ascent, where does that leave credit cards? Since the start of the Covid-19 pandemic, the value of credit card transactions in the United States has dropped by approximately 11%⁴. You could argue that consumers were spending less thanks to job loss and closed stores amid economic uncertainty, and there may not be definitive data yet to suggest they are shifting spending from credit to BNPL, but data does suggest “a universal decline in credit card ownership,” particularly among Gen Z consumers, half of whom don’t even own a credit card⁴. As the revenue streams of big banks in certain regions dry up thanks to loss of interchange and other card-related fees, the credit card industry is looking for ways to offset those declining transactions. Rather than looking at BNPL as direct competition, banks and other traditional lenders can look at BNPL as an opportunity.

“As the digital word spins faster, people expect financial services to be aligned with their busy and demanding lifestyles. The wide adoption of [BNPL products] being universally integrated into purchases reduces friction, grows sales, and gives consumers more options to improve the customer experience. Banks that ignore this market dynamic risk missing out on the opportunity to engage with future generations of borrowers.”⁴

Lending United

How can BNPL and credit cards work together then? Is there an ideal future state where each space merges together to offer consumers the best of both worlds? There are pros and cons to traditional credit card lending as well as Buy Now, Pay Later plans – depending on a particular consumer’s perspective, risk comfort level, cash flow needs, credit history, etc. If banks were able to include checkout purchase options in their digitization strategy⁴, they could help ensure longer-term growth potential – perhaps giving users options to pay in installments via credit card or offering lower interest rates. Some consumers may not be aware that the traditional BNPL model shifts the interest fees away from the consumer and onto the merchant, offering a mutually attractive option for both (less perceived interest on the part of consumers, and larger carts with less abandonment for merchants). But, in part as a result of the apparent lack of interest, some 30% of BNPL users trust BNPL providers more than credit cards when it comes to fair business practices.⁵  

BNPL providers could protect consumers with a blended approach – keeping the simplified lending consumers love (particularly at checkout) but offering additional rewards or perks and ensuring that consumers are able to actually build credit with their use of installment payments. And the rewards of convergence would be worth it as the runway of opportunities is not getting any smaller – a study by Mastercard showed that “43% of consumers in Asia Pacific are willing to increase their spending by at least 15% if allowed to pay in installments.” Meanwhile a research study conducted by Coherent Market Insights showed that the global BNPL market will grow to upwards of $33.6 billion by 2027 (a massive increase from $7.6 billion in 2019)⁶. To capitalize on this growing market (and those consumers who want to increase their spending) MasterCard invested in Pine Labs, an Asia-based BNPL provider. The partnership aims to bring new installment plans to Asia, with a solution rolled out earlier this year in Thailand and the Philippines, followed by Vietnam, Singapore and Indonesia. Credit, debit and bank cardholders in the region will subsequently have access to installment plans for both online and bricks and mortar merchants upon checkout.

With more than half of the world’s consumer borrowing happening in the Asia Pacific region, there are massive opportunities for fintechs to offer shoppers what they want – namely flexibility and convenience. In a press release from earlier this year, Sandeep Malhotra, Mastercard’s Executive Vice President, Products & Innovation, Asia Pacific outlined the benefits to both consumers and merchants. Flexibility and cash flow management for the former; an increase in sales and reduction in cart abandonment for the latter. And of course, the development of an omni-channel solution benefits MasterCard too: “Installment options complement Mastercard’s wide range of payment programs and align completely with Mastercard’s mission of fostering an integrated, inclusive digital economy and delivering great checkout experiences with payments that are secure, simple and smart.”⁷

MasterCard isn’t the first credit card company to think outside the box (and they won’t be the last). American Express launched a BNPL-style service in 2017, with its cardholders utilizing installment payment plans for nearly $4 billion in purchases. The “Pay It, Plan It” program directs AMEX to pay a card transaction right after it’s made through a linkage with the consumer’s bank account, and then permits consumers to turn that card transaction into a short-term installment plan for a small fee⁸. As mentioned, traditionally the merchants pay these types of fees, meaning AMEX is shifting this cost to the consumers – another example of the many ways the term BNPL is no longer a one-size-fits-all product.

By utilizing some of the most-loved aspects of BNPL, credit cards can help ensure their ongoing relevance. And at the same time, evolving their lending methodology and risk decisioning processes could help them widen their net. For example, “alternative data can be used to better underwrite loans for consumers who fall outside of traditional credit metrics,” like the unbanked or underbanked (who usually love BNPL), particularly in regions where it’s very difficult for the average consumer to build credit because spending profiles have changed⁹. Using technology to better access and aggregate real-time data to make better credit decisions can also potentially provide an easier intersection of BNPL and credit cards – better data and instant decisioning means less risk, allowing providers to offer more personalized payment plans. As Jim Marous put it, “financial institutions must deliver innovative credit options, on-demand, in an almost instantaneous manner” to capture the hearts (and wallets) of their target audience¹⁰.   

A Match Made in Fintech Heaven

The future of BNPL is here – in fact, it changes almost daily. And the credit card industry can clearly capitalize on that on a wider scale, if the success of the regional, niche partnerships that MasterCard and AMEX offer are any indication. Not only does a thoughtful marriage help both industries continue to benefit from the incredibly large runway of available market share, it helps merchants and consumers too. As we strive for more inclusion in this increasingly global, diverse world, BNPL and credit cards have the opportunity to give more viable lending/payment/purchasing options and more protection to all types of consumers, especially the unbanked and underbanked. And what better way to help stimulate the global economy than being sure that everyone has a chance to participate in it?

For more information on what industry influencers say about the future landscape of BNPL, read our latest eBook.