The credit card heavyweights, who have long shown little anxiety about buying now / paying later, are beginning to recognize the need to match the offers of these newbie companies.
In recent days, a few major card issuers have either announced new BNPL offerings or signaled that they are on the verge of doing so. Their products are poised to compete with the short-term installment loans from fintechs like Affirm, Afterpay and Klarna, which cater to millennials and Gen Z consumers, and pitch their products as easier-to-understand alternatives. to credit cards.
Last week, Synchrony Financial, which partners with merchants on credit cards, noted that it will add a “Pay in 4” loan that retailers can choose to offer to their customers.
And this week, executives from a trio of banks spoke at a sector conference about their plans in the buy now / pay later market.
Capital One Financial has announced that it will test a BNPL product with a subset of traders and clients. US Bancorp said it is also testing Buy Now / Later, and a senior executive at JPMorgan Chase advised investors to “stay tuned” for information on the bank’s work in the buy now category / later later.
These lenders were “a little caught off guard” at the onset of the COVID-19 pandemic, when a boom in e-commerce sales benefited BNPL providers whose loans were integrated into merchant websites, said Sanjay Sakhrani, analyst at Keefe, Bruyette & Les bois.
Since then, incumbents in the card industry have strengthened their capacities and are now ready to offer similar products in what will become a more competitive market, he said.
“A lot of fintechs have created an experience and obviously a brand in many cases that consumers appreciate and trust,” Sakhrani said. “But on the other hand, the same is true for historical consumer lenders, and I expect them to take advantage of that to compete in the market.”
The boom in BNPL funding led to deals that grabbed the headlines, with Square Okay buy Afterpay for $ 29 billion and Amazon saying he is testing the Affirm product with a limited number of customers. PayPal competes in the market as well, and Apple is reportedly developing a product with Goldman Sachs.
Buy-it-now / pay-later companies typically offer interest-free financing to consumers, with loans repayable in four short-term installments. Suppliers generate a large portion of their revenue from retailers, who often pay higher fees than for credit card transactions.
To some extent, credit card companies started offering buy-it-now / pay-for features years ago, noted Yanni Koulouriotis, vice president of rating agency DBRS Morningstar. In 2017, American Express launched its Plan It feature, which allows customers to turn purchases of $ 100 or more into installment loans rather than revolving card debt. Citigroup later unveiled a similar product.
Now, card issuers are looking to dip their toes deeper into the water, even though plastic remains the dominant method of financing online purchases.
JPMorgan Chase rolled out installment loan options in 2019, allowing card customers to borrow a certain amount against their available credit through My Chase Loan, as well as an offer that allows borrowers to pay for larger purchases at over time via fixed payments.
While JPMorgan does not have a buy now / pay later program available for consumers who do not have Chase credit cards, that could change in the future, according to Marianne Lake, co-head of consumer banking. and corporate communities, who spoke at the Barclays Financial Services Conference on Tuesday.
The largest US bank in terms of assets has several advantages working in its favor, including a customer base of over 60 million households and a reputation as a trusted payments provider, Lake said.
“We may not be the first to buy now / pay later, but we have the full range of loan, payment and trade capabilities, and longer term I think that’s the situation in her. together, ”she said. “We have the customer base and the distribution, so we’re working on all of that. So stay tuned. “
US Bancorp is also exploring the buy now / pay later market. Company executives said on Tuesday that a BNPL option could complement the Minneapolis bank’s substantial payments business, which includes credit and debit cards, corporate payment products and merchant processing services. . Payments revenue accounted for 26% of the bank’s net income from assets of $ 559 billion in the second quarter.
“Buying now / paying later is a phenomenon that we’re looking at, and we actually have some test cases going on,” said CEO Andy Cecere. “I think that’s an ability that we want to pursue.”
Capital One will test its own BNPL product later this year with some existing clients and merchants, CEO Richard Fairbank said at the conference on Monday, although he declined to provide further details.
McLean Bank, Virginia’s entry into BNPL is particularly notable given its earlier decline against such products. Last year, Capital One banned the use of its credit cards for payments on all types of point-of-sale loans, although customers can use their Capital One debit cards and checking accounts to buy now / pay later.
Fairbank looked at existing buy now / pay later suppliers, noting that they take substantial margins on every purchase and that “the elephant in the room is the sustainability of the merchant subsidy.”
For their part, Buy It Now / Pay Later businesses claim that their merchant partners are getting increased sales through their flexible payment options. The Afterpay website, for example, says the company has helped increase the average order value of its merchants by up to 40%.
Affirm says on its website that merchants are seeing a repeat buy rate of 20% and that adopting the company’s BNPL offering may give customers “even more reason to come back again and again.” Klarna’s website says that up to 40% of the company’s sales come from new customers and its products give customers “the ultimate flexibility and keep them coming back for more.”
Announcing Synchrony’s Pay in 4 product, CEO Brian Doubles said that while many existing partners have expressed interest in the buy now / pay later offers, they are “really thinking about the economy” and making sure not to run out of additional income.
Synchrony’s offering will launch in October and the company says merchants will find its product appealing because it will give them another option to reach customers. For example, a new customer might finance a purchase through a Buy Now / Pay Later loan and later open a retail credit card for repeat purchases.
Increased competition from banks will certainly result in squeezing the margins of existing companies buy now / pay later, said Koulouriotis of DBRS Morningstar. Yet BNPL’s purchases are only a small part of the market, and the “jury is still out” on whether they will be a game-changer in the long run, he said.
Some consumers may be much more interested in credit card rewards than funding their purchases over time, Koulouriotis noted. “There is room for both,” he said.