Credit card heavyweights, which long showed little angst about buy now/pay later competitors, are starting to acknowledge the need to match the offers from those upstart firms.
In recent days, a few major card issuers have either announced new BNPL offerings or signaled that they are closer to doing so. Their products are poised to rival short-term installment loans from fintechs like Affirm, Afterpay and Klarna, which market to millennials and Gen Z consumers, and tout their products as easier-to-understand alternatives to credit cards.
Last week, Synchrony Financial, which partners with merchants on credit cards,
And this week, executives from a trio of banks spoke at an industry conference about their plans in the buy now/pay later market.
Capital One Financial announced that it will test a BNPL product with a subset of merchants and customers. U.S. Bancorp said that it is also testing buy now/later, and a top JPMorgan Chase executive advised investors to “stay tuned” for information about the bank’s work in the buy now/later later category.
Those lenders were “caught a little bit flat-footed” early in the COVID-19 pandemic, when a boom in e-commerce sales benefited BNPL providers whose loans were integrated into merchants’ websites, said Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods.
Since then, card industry incumbents have built up their capabilities and are now ready to bring similar products into what will become a more competitive market, he said.
“A lot of the fintechs have created an experience and obviously a brand in many cases that consumers like and trust,” Sakhrani said. “But on the other side, so have the legacy incumbent consumer lenders, and I expect them to leverage that to compete in the marketplace.”
The boom in BNPL financing has led to some headline-grabbing deals, with Square
Buy now/pay later companies typically offer interest-free financing to consumers, with the loans repayable in four short-term installments. The providers generate much of their revenue from retailers, which often pay higher fees than they do on credit card transactions.
To a certain extent, credit card companies began offering buy now/pay later capabilities years ago, noted Yanni Koulouriotis, a vice president at the ratings agency DBRS Morningstar. In 2017, American Express launched its Plan It feature, which lets customers turn purchases of $100 or more into installment loans rather than revolving card debt. Citigroup
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, enabling card customers to borrow a certain amount against their available credit through My Chase Loan, along with an offering that lets borrowers pay off larger purchases over time via fixed payments.
While JPMorgan does not have a buy now/pay later program that's available to consumers who lack Chase credit cards, that could change in the future, according to Marianne Lake, the company’s co-head of consumer and community banking, who spoke Tuesday at the Barclays Financial Services Conference.
The largest U.S. bank by assets has several advantages working in its favor, including a customer base of more than 60 million households and a reputation as a trusted payments provider, Lake said.
“We may not be the first mover in buy now/pay later, but we have the full suite of payment lending and commerce capabilities, and over the longer term I think that’s the bigger picture,” she said. “We have the customer base and distribution, and so we’re working on all of that. So stay tuned.”
U.S. Bancorp is also exploring the buy now/pay later market. Company executives said 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 $559 billion-asset bank’s net revenue in the second quarter.
“Buy now/pay later is a phenomenon we’re looking at, and we actually have some test cases underway,” CEO Andy Cecere said. “I do think it is a capability we want to pursue.”
Capital One will be testing its own BNPL product later this year with certain existing customers and merchants, CEO Richard Fairbank said Monday at the conference, though he declined to provide more details.
The McLean, Virginia-based bank’s entry into BNPL is particularly notable given its earlier pushback against such products. Last year, Capital One banned the use of its credit cards for payments on all types of point-of-sale loans, though customers can use their Capital One debit cards and checking accounts for buy now/pay later transactions.
Fairbank took a shot at existing buy now/pay later providers, noting that they take substantial margins on each purchase and that the “elephant in the room is the sustainability of the merchant subsidy.”
For their part, buy now/pay later companies say that their merchant partners get a boost in sales from their flexible payment options. Afterpay’s website, for example, says the company has helped increase its merchants’ average order value by up to 40%.
Affirm says on its website that merchants see a 20% repeat purchase rate, and that adopting the company’s BNPL offering can give customers “even more reason to come back again and again.” Klarna’s website states that up to 40% of the company’s sales come from new customers and that its products give customers the “ultimate flexibility and keep them coming back for more.”
In announcing Synchrony’s Pay in 4 product, CEO Brian Doubles said while many existing partners have expressed interest in buy now/pay later offerings, they are “really being thoughtful about the economics” and ensuring they don’t miss out on additional revenues.
Synchrony’s offering will launch in October, and the company says merchants will find its product attractive 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 to make repeat purchases.
The increased competition from banks is sure to lead to a compression in margins for existing buy now/pay later companies, said DBRS Morningstar’s Koulouriotis. Still, BNPL purchases make up a small share of the market, and the “jury’s still out” on whether they will be a game changer in the long run, he said.
Some consumers may be far more interested in credit card rewards than they are in financing their purchases over time, Koulouriotis noted. “There is room for both,” he said.
