Initial concerns about buy now/pay later loans cannibalizing credit card issuers' market share haven't come to fruition, but as BNPL fintechs tweak their products, their loans are looking more like traditional credit cards.
Large BNPL fintechs like Klarna, Affirm and Afterpay, which saw strong adoption with online merchants during the pandemic, are moving aggressively into brick-and-mortar stores, with
Another significant change is BNPL fintechs' recent introduction of
The fees expand the revenue streams available to BNPL fintechs — which previously relied primarily on merchants' payments of around 3% to 6% of the sale for closing deals with instant loans — while extending the channels where they can reach consumers, analysts say.
More than half of U.S. consumers have been pitched a BNPL loan, and about one in five has used a BNPL loan to make a purchase in the last year, according to recent data from the
"The BNPL giants are doing what the credit card issuers did years ago — adding fee-based products and refining their underwriting process as they drive toward greater usage and profitability," said Hugh Tallents, a senior partner and financial services practice lead at consulting firm cg42.
BNPL fintechs aren't a direct threat to credit card issuers yet, he noted.
Credit card issuers are having a strong year, with card balances notching their
But BNPL fintechs' latest moves are laying the groundwork to compete head-to-head with credit card issuers in the future, according to Tallents.
"With more merchants offering BNPL options alongside credit and debit cards, and stores accepting BNPL cards, it legitimizes this as a mainstream way to pay, and builds habits with younger consumers that will quickly become entrenched," he said.
Klarna introduced its Visa-branded physical debit card last year via WebBank, enabling consumers to finance a purchase at any store, and added $4.99 a month fee for access to 0% Pay in 4 loans that are repaid within six weeks. Afterpay charges a $5.99 monthly fee for its new Afterpay Plus virtual debit card, issued by First Electronic Bank.
Affirm is
BNPL regulations coming?
One cloud hanging over the BNPL industry's growth is the likelihood of the Consumer Financial Protection Bureau — which issued a
But BNPL providers increasingly offer borrowers the option to finance a loan over dozens of months, with interest rates ranging between 24% and 36%. About one in 10 BNPL loans now carry an interest rate, according to research from
In its recent BNPL user research, the New York Fed noted that many BNPL lenders don't furnish data to the major credit reporting agencies. That could heighten risk for lenders, who may be unaware of a prospective borrower's overall debt exposure from BNPL loans.
One exception is Apple, which vowed to report all lending data to credit agencies from
Many observers also expect that BNPL use will negatively affect users' credit scores over time.
The Federal Reserve Bank of Philadelphia last month
Analyzing a unique data set combining anonymized survey data and appended credit bureau data collected by market research firm Competiscan, the Philly Fed found that consumers with the highest credit scores are less likely to use BNPL loans. But BNPL loan use hasn't yet caused broad harm to consumers' credit scores.
"Overall, we find that — at least among consumers with established credit profiles — BNPL use does not seem to significantly affect a consumer's credit profile in the short term," Philly Fed researchers wrote.
BNPL fintechs may not be stealing market share from traditional credit card issuers yet, but their rapid growth adds uncertainty to the consumer finance ecosystem, said Daniela Hawkins, managing principal at Capco.
"BNPL loans appeal to the mass affluent person looking for an alternative way to pay for a designer handbag or an exercise bike, and also to the person who's living paycheck-to-paycheck. In the current economic environment I don't think anyone knows what the long-term effect of BNPL loans will be on consumers or lenders overall," Hawkins said.
A look at the business model of Affirm, which launched in 2012, confirms its BNPL loans span a wide range of users and loans.
The
Multiple loan options at checkout
Consumers may finance purchases via Affirm online or through the card. In combination with the Affirm app, card users can pre-qualify for a loan before making a purchase in a store, or opt for a loan at the point of sale, or pay in full and convert the purchase to a loan within 24 hours.
"At lower price points, consumers use Affirm through Pay in 4 loans online and with the card, and we also offer financing online for big-ticket vacations and cruises in the $2,000 to $4,000 range," said Pat Suh, Affirm's senior vice president of revenue. Affirm's loan terms range from 0% to 36% and can extend up to 60 months.
The San Francisco-based firm last month announced a partnership with Booking.com, clinching Affirm's role as the leading BNPL provider of online travel services — an area that's seeing booming growth as consumers continue to drive record travel spending — through its existing partnerships with Expedia, Kayak and Priceline.
"Travel is one of our fastest-growing areas, with people financing purchases six months or a year in advance," Suh said.
Affirm relies on a proprietary underwriting formula that considers the item being purchased, the user's history with Affirm and other publicly available data, Suh said.
About three-quarters, or 72% of Affirm's loans are interest-bearing, up from 61% a year ago. The company's delinquencies, which peaked at about 4% in 2018, have been tracking steadily lower, stabilizing this year at about 2.3%.
"We don't approve everybody, but we offer multiple loan programs based on what's best for the borrower," Suh said.
Affirm collects revenue from merchants through various channels. In addition to earning a fee from merchants for closing sales, Affirm in some cases allows merchants to subsidize zero-interest loans, not unlike some private-label credit card partnerships.
But when a customer makes a purchase in a store with the Affirm debit card at a merchant where Affirm has no pre-arranged marketing deal, the consumer isn't likely to see the company's most attractive loan offers, Suh said.
The BNPL industry's efforts to expand its reach and revenue streams will be critical to the industry's long-term survival, according to cg42's Tallents.
"These companies got their big start when firms were being evaluated mostly on growth, but now they'll be measured by profitability, and as they improve their underwriting and add fees, they're looking more and more like credit card companies," he said.
Just as credit cards are regulated, BNPL firms will eventually come under similar rules to protect consumers with similar credit-reporting rules, Tallents predicted.
"BNPL has changed the way people pay for things, and it's not going away. It's still extremely nascent, both in terms of its evolution and market distribution, but BNPL is one of those things that won't look like a threat to credit card issuers until suddenly it is," he said.
