Credit card issuers can’t overlook the BNPL opportunity

By Puja Sharma

Since the interest in BNPL is so strong, it’s a natural progression for credit card issuers to offer BNPL plans that mirror (and improve upon) the programs that BNPL FinTechs offer. BNPL programs are still loans, and credit card issuers have been in the loan business for many more years than the FinTechs.

Credit card issuers could be energised by trends highlighted in the State of Loyalty: 2022 Credit Card Rewards Report from loyalty solutions firm iSeatz released recently. A type of reverse “layaway” approach, buy-now-pay-later (BNPL) plans, digital wallets, and rewards with points and cryptocurrency could be the next big thing for credit card issuers.

In BNPL, consumers can pay for products or services in several installments (usually with a small fee added instead of interest). It’s a better option than traditional layaway, which defers a customer’s receipt of products or services until the customer pays the entire balance.

Third-party FinTech firms lead the BNPL movement. And it’s becoming a crowded space where companies, including PayPal Credit, Afterpay, Affirm, Klarna, Zip Pay, Quadpay, Uplift, Perpay, Sezzle, and Zebit, aggressively compete.

FinTechs partner with retailers to offer the plans to consumers at the point of sale online through the participating retailer’s eCommerce website or, in several cases, offline via the BNPL company’s app. The app creates a digital card that customers can add to their digital wallet (Apple Pay, Google Pay, or Samsung Pay, for example) for tap-to-pay convenience.

Advantages of Buy Now, Pay Later

Consumers flock to BNPL because it’s a faster, more transparent, and more convenient way to access credit. It helps consumers lock in low prices for big-ticket items like travel and addresses their growing desire for more flexible spending options.

Plus, when consumers make BNPL purchases using a credit card that is part of a rewards program, they can earn miles, points, or cash back in addition to deferring payments that can remain interest-free if they pay off their credit card every month.

Most BNPL companies earn financing fees (ranging from 2% to 8%) from the merchant. However, they may also charge fees to consumers on larger purchases (travel included) depending on the buyer’s credit score and other factors. They also typically earn revenue and late fees charged to consumers who fail to comply with repayment terms.

And despite the high cost of participation in BNPL programs, merchants are buying into the BNPL trend because, as BNPL firm Afterpay explains, it drives incremental sales, increases average order value, and attracts new customers.

An opportunity for credit card issuers

BNPL is snowballing in popularity. Analysts expect such short-term, point-of-sale financing to grow 181% by 2024, and the Federal Reserve Bank of Kansas City, citing data from Accenture, said, “the number of BNPL users in the United States has grown by more than 300% per year since 2018, reaching forty-five million active users in 2021.

Amex Trendex data shows that Millennials, a highly sought-after customer segment for credit card issuers, are mainly behind the trend. 54% are interested in using a BNPL plan for travel and 62% are interested in a buy-now-pay-later offering that comes with their credit card.

Because the interest in BNPL is so strong, it’s a natural progression for credit card issuers to offer BNPL plans that mirror (and improve upon) the programs that BNPL FinTechs offer. BNPL programs are still loans, and credit card issuers have been in the loan business for many more years than the FinTechs.

Getting a piece of the BNPL pie

With market share threatened, credit card issuers have been eager to develop their BNPL offerings. American Express, Chase, and Citibank have launched and expanded BNPL programs in which cardholders can divide larger purchases into payments for a fixed monthly fee and no interest charges. Other major banks and payment networks have announced they are also exploring proprietary BNPL programs.

Keeping the BNPL transaction and account servicing in-house in a travel rewards program also protects the issuer’s brand. BNPL companies are at their best at the point of sale, but some lose interest when flights are canceled or delayed incurring extra charges.

Once the consumer has demonstrated the appropriate behavior by paying off the short-term loan, issuers could offer the more traditional revolving line of credit, which comes with access to the issuer’s rewards program and other benefits.

Key Highlights

• BNPL plans, digital wallets, and cryptocurrency could be the next big thing for credit card issuers.
• FinTechs partner with retailers to offer the plans to consumers at the point of sale via the BNPL.
• Consumers flock to BNPL because it’s a faster, more transparent, and more convenient way to access credit.
• With market share threatened, credit card issuers have been eager to develop their BNPL offerings.
• Keeping the BNPL transaction and in-house rewards program also protects the issuer’s brand.
• Increased competition may also be a compelling argument for credit card issuers to invest in BNPL.