Buy Now, Pay Later: The New Credit Card Acquisition Channel

OBSERVATIONS FROM THE FINTECH SNARK TANK

Americans are rapidly embracing Buy Now, Pay Later (BNPL) services. According to research from Cornerstone Advisors, the percentage of Gen Zers making purchases with BNPL plans grew six-fold between 2019 and 2021. Millennials’ use of BNPL more than doubled over the same period to 41%, Gen Xers’ adoption more than tripled, and even Baby Boomers got into the act.

Overall, consumers made nearly $100 billion in retail purchases using BNPL programs in 2021—four times the 2020 amount of $24 billion.

Is BNPL Eating Credit Cards?

There are reports that it’s eating into credit card volume.

(In a subsequent tweet, @mdharrisnyc said “someone told me this based on a private off-the-record dinner that I did not attend.” A tweet of mine asking Harris about the volume claim was unanswered.)

This isn’t the first time industry observers have proclaimed credit cards to be dead or dying. For more bad prognostications see:

• “The Painless Death of Credit Cards Continues,” Motley Fool, March 2011
• “The Slow Death of Credit Cards,” Motley Fool, April 2013
• “The Death Of The Credit Card Is Near — Here's How To Profit,” Nasdaq, October 2013
• “Buy Now, Pay Later Consumer Financing Takes On Credit Cards,” Investor’s Business Daily, September 2021

Reports of Credit Cards’ Death are Greatly Overstated

According to the Nilson Report, however, the 100 largest US issuers of Mastercard and Visa credit cards generated $1.492 trillion in purchase volume in the first half of 2021, up 22% from the first half of 2020.

A number of issuers saw impressive gains in the number of cards in force in that timeframe, as well. The largest issuer, Chase, with more than 111 million cards, saw a 14% increase. Goldman Sachs, the issuer behind Apple’s card, grew cards issued by 48% and ended the first half of 2021 with $5.2 billion in outstandings, up 128%.

It wasn’t just the old guard seeing growth. Upgrade, founded by former Lending Club CEO Renaud Laplanche, cracked the top 50 with $416 million in outstandings—a 756% jump from 2020—and 217,000 cards issued, 678% more than the prior year.

So what are (and were) the credit card doomsayers missing?

• Generational shifts. In 2013, the oldest Millennials—who, today, are 26 to 41 years old—were barely 30 years old. Their credit scores weren’t attractive to a lot card issuers then. As their life stages changed, however, so did their credit scores. Just as important, however, was the sheer number of Millennials infesting the planet. While there was certainly a shift to debit card purchases, the influx of Millennials in the market buoyed credit spending.
• Economic conditions. How quickly we forget how bad the economy was following the “height” of the financial crisis of 2008-2009. Consumers’ diminished credit card spend and debt levels shouldn’t have been unexpected—and it certainly wasn’t a sign of the impending “death” of credit cards.

Just as observers misread the trends toward debit card spending in 2013 as a sign of credit card decline, so are today’s BNPL advocates misreading the long-term impact of buy now, pay later. According to Capital One co-founder and managing partner at venture capital firm QED Investors, Nigel Morris:

“BNPL is here to stay. There’s an inexorable trend toward digital and that is only going to increase. But many people are overstating BNPL’s cannibalization of cards.”

Buy Now, Pay Later is a Credit Card Acquisition Tool

Credit card issuers shouldn’t rest easy however. As I wrote in Buy Now, Pay Later: The “New” Payments Trend Generating $100 Billion In Sales:

“What’s different—and important—about BNPL is its place in the customer journey. Payment options typically come at the end of the journey. Today’s BNPL services influence consumers’ choices of products and providers earlier in the journey.”

QED’s Morris agrees:

“BNPL is an acquisition channel. The cost to acquire is low, and BNPL providers have proprietary data in position to offer other data-driven services.”

BNPL isn’t just an acquisition channel for merchants, however. It’s an acquisition channel for credit cards, as well—although some may not see it that way. American Express’ CEO Stephen Squeri was recently quoted as saying:

"Buy now, pay later is not really a competitive threat to us. It's targeted at debit card issuers. As a customer acquisition vehicle it's not the game we're playing."

Squeri took some heat for that comment on Twitter from the BNPLiterati, but he’s not wrong. BNPL is not a good fit for all cards. Most Discover cards, yes. Most Amex cards, no. Capital One Platinum Secured Credit Card, yes. Chase Sapphire Rewards, no.

Many current BNPL users may not be attractive candidates for issuers like Amex. But when their credit scores are attractive to issuers like Amex, BNPL providers will have a deep history of their purchase and repayment activity, making it easier for them to offer credit cards with the right pricing and features.

Buy Now Pay Later Companies are The Real Threat

BNPL isn’t threatening credit cards. The real threat: BNPL companies will displace established credit card providers.

Why? Buy now pay later companies are establishing: 1) a deep history of young consumers’ purchase and repayment activity; 2) relationships that avoid revolving debt, high interest rates, and punitive fees; and 3) symbiotic merchant relationships.

BNPL is like training wheels for credit cards. It gives its users entry levels of credit. When BNPL customers demonstrate the need for more credit—and ability to repay—BNPL providers will be there with full-blown credit card offers.

BNPL companies like Klarna and AfterPay are “credit card” issuers. Distinguishing between short-term credit (i.e., BNPL) and longer-term credit (credit cards) is meaningless. Credit is credit. As QED’s Morris says:

“In the end, it’s still lending—and to succeed the BNPL players will need longer term lending chops. It’s still to-be-determined how newcomers will develop the heuristics needed to manage credit.”

Banks’ Buy Now, Pay Later Futility

The response from many established credit card issuers (with the exception of Amex) to the BNPL trend is the jump on the bandwagon. It’s a futile response for two reasons:

• They’re offering BNPL to the wrong people. Offering BNPL capabilities to the overall population of credit card holders is a mistake. Many credit cardholders don’t need BNPL capabilities (45% pay their bill in full each month, and only 27% carry a balance most of the time).
• They don’t have the ability to help merchants. Afterpay intends to enable its merchant partners to advertise on the BNPL firm's app to boost their promotions, products, and offers. Klarna is building out a shopping “super app” to support its merchant ecosystem. I can’t think of an issuer in Nilson’s top 100 list who can come close to providing these capabilities.

To be fair, there is a countering opinion here. Alex Johnson, Director of Fintech Research at Cornerstone Advisors argues:

“Banks can make an argument to merchants that the big BNPL companies are bad partners because they’re selling the customers they got from the merchants back to them, which isn’t a good deal. Banks could be better partners by white labeling their BNPL offerings.”

That may be, but most bank issuers don’t have the scale to partner directly with a meaningful number of merchants and will have to rely on Visa or Mastercard to do so. And as long as there’s interchange, the networks are merchants’ enemies.

Want to know what’s going on in banking? For a copy of Cornerstone Advisors’ report What’s Going On in Banking 2022: Rebounding From the Revenue Recession, click here.