Transcription:
John Adams: (
Okay, well again, thank you everybody for coming the panel is buy now pay later understanding the customers and merchants driving BNPL. I'm John Adams from American Banker and our panelists are Bryce Deeney co-founder and CEO of Equipifi, George Danforth, COO of Splitit and Hannah Gdalman from the Financial Health Networks, Financial Services Solution team. So I thought to start, when did you guys go through what you do, your job duties and what kind of products your company or organization provides?
George Danforth: (
Sure. I'm George Danforth, I'm the chief operating officer for Spliti. Splitit provides, enables credit card, to the rails to be utilized for buy now pay later. So we look to we're a technology company, not a brand pursue, and we look to unlock, the credit card rails end to end, for credit card issuers, networks and merchants.
Bryce Deeney: (
I'm Bryce. I'm a co-founder and CEO of Equipifi. It it's awesome. We're sitting next to each other. At Equipifi we enable debit card transactions through the networks for financial institutions to offer buy now pay later to their debit card holders fully integrated with mobile banking, core banking solutions. So what do I do on a daily basis? I wear every hat. We're an early stage company. We have 22 employees. We started last year, so I spend most of my time hiring and implementing our early stage customers.
Hannah Gdalman: (
My name is Hannah Gdalman. I'm coming from the Financial Health Networks. The Financial Health Network is a national nonprofit and our mission is to improve financial health for all. And we do that in a variety of ways. We partner with a range of financial institutions, credit unions, business leaders, policymakers, employers, who are interested in improving the financial health of their employees, consumers, clients, etc. And we also do research and most of what I'll be talking about today is part of a research initiative called the Finhealth Spend Report, which is an annual report in its 10th year. That looks at how people in America are spending on financial services.
John Adams: (
And obviously buy now pay later has taken off rapidly over the past year or two here in the US. It started in Europe, it was slower to catch on here in the US, but a lot of consumers, a lot of merchants are turning to it now. What are some of the changes that you've noticed in the past year or so? On both the merchant and the consumer side in terms of what they're looking for, why they're interested in buy now pay later and what they're hoping to accomplish by accessing the product?
George Danforth: (
Yeah, I mean what we've seen is rapid growth, of course, across every vertical imaginable. I mean people are ordering pizzas, $20 pizzas for payments and, so it's going across verticals and I don't even know that all the verticals make sense. But it is proliferating out there. A lot of low AOV, high average order value across verticals. Like I said, I'm starting to see it in B2B but also things like dental services sort of built into their cash register systems and what not for, and so in various different services, that are like that small business. So it's exploding everywhere. I don't think it's rationalized yet, but we'll have more questions with regard to where it goes forward, but right now it's just, everybody's throwing mud at the wall seeking more customers and more revenues. And so that's what I see.
Bryce Deeney: (
Yeah. I would agree. I think a few years ago it was predominantly either a smaller AOV or large, like discretionary, like the pelotons, right? The classic example. And now you're seeing a little bit more of a democratization of where does buy now pay later installments actually apply at the consumer level. Most of the transactions kind of balance out around $50 up to several thousand dollars. I know open pay who's in the other room, they focus on the very large ticket, right. The 5,000 to 20,000. But it definitely is becoming more democratized where consumers expect to receive some type of offer that then ends up competing with the card that they typically would use in their wallet. On the B2B side, there's a lot of people are trying to solve that problem right now. It's definitely a race to acquire those customers integrating into like obviously the front end shopping cards, but also the ERPs, you know, attaching to purchase order sales orders for these very large ticket B2B purchases. So I like the mud on the wall Analogy. I think that, we are gonna see winners as interest rates rise and losers, within this space, but right now it is definitely a race.
Hannah Gdalman: (
Yeah. It's certainly no secret that buy now pay later has experienced massive growth in the US. In recent years, when we looked at interest and fees spent by consumers on buy now pay later in 2021, however we saw about a billion and when we compare that up against the 95 billion spent on revolving general purpose credit card, you know, it's still a small fraction of that market. When we look at how people are using it, we surveyed. It's a nationally representative survey. We found that 10% of people reported using buy now pay later in 2021, in the 12 months prior to November, 2021 to be precise. And of those 10% we found that almost half reported three or more transactions in that same time period. So there's certainly indication that people are using this time and time again, there's kind of indication of repeat usage. So we'll have to kind of see how that shifts and if that changes.
John Adams: (
We mentioned pizza and we came across some research last week that almost a quarter of BNPL is going toward groceries. That's not what I would've expected having written about it. It seemed it was moving toward larger purchases, which it is, home improvement, large appliances. It is the use of buy now pay later for food and for groceries. Is that something that surprises you, and if it does, how does that change the approach to the market?
George Danforth: (
It doesn't surprise me. And I think we're likely to see more of it as economic, if we have economic difficulties and inflation. I think it's a real concern. My company Splitit, we do a lot of high AOV. I think our average ticket size is like $800. So we do a lot of high ticket because people like to use their credit card, cause credit card is a perfect place for high ticket. Because if you are a legacy BNPL, you have a real hard time, real time underwriting a consumer on the fly, for anything much over $200. So I think that's the big opportunity for the banking industry is that I think it's very difficult for third parties out there today to underwrite with any type of risk, with any acceptable risk profile, ticket sizes of a material size and getting a decent approval rate. So I think I look forward to the banking industry, sort of stepping into this space a little more aggressively in the future, cause I think it's totally untapped. I think the biggest story about BNPL is not the growth of BNPL, whether it be for groceries or pizza or anything, it's the people that aren't pushing the button today that would push the button if they could get BNPL through their existing credit card issuer. And I think that's gonna be the big story.
Bryce Deeney: (
I definitely have a unique perspective,, when it comes to grocery BNPL and what I would ask a banker who runs a consumer credit portfolio and say, are you shocked that 15 or 20% of your card usage is at Costco and Safeway? And they would say no. And I think it's because the lends of buy now pay later from several years ago, the Peloton lends, that's what scares people. But really, if you think about the predominant users who are using buy now pay later multiple times a year, they're likely using your existing card rails for normal purchases, pre primarily debit cards, because they haven't upgraded to that credit card yet. And then now they're receiving fractional lending from a third party FinTech. That's allowing them to spread out their payments over time. So there's this really unique gap that exists today, that third party fintechs like the affirms of the world are solving, that we're trying to partner with banks that way they can actually have a competing product. So that 27, 28 year old, who says, I wanna buy $300 in groceries, but I may not have enough money in my checking account to withdraw this full amount right now. How do I let borrow $300 and spread out that payments over time? So I would just maybe do a cross comparison to the credit portfolio and the debit portfolio and see that you're already underwriting these types of transactions today. It's just on a revolving credit versus a fractionalized, smaller credit line.
Hannah Gdalman: (
Yeah, I think, well one of the more salient findings in our research was we found that financially vulnerable households. And when I say financially vulnerable household, I'm talking about a high household, who's facing a variety of financial challenges, spanning from balancing income, with expenses saving for the short or long term, they may be credit challenged, any combination of these sorts of challenges. These financially vulnerable households were four times more likely to have used a buy now pay later service in 2021 than a financially healthy household and a financially healthy household of course, is on the opposite under the spectrum. They're not facing these same sorts of challenges. So it certainly brings before, if and as the economy slows, how are these households kind of using the service? How are they paying for, everyday expenses?
Hannah Gdalman: (
We'll certainly wanna watch to see if we see trends towards more necessary purchases like buy now pay later for gas or groceries and what that might say about how consumers are spending and we will also wanna watch average purchase price or size. We found in our survey among all users, they owed an average of $330 across any and all outstanding buy now pay later loans, Klarna, I think their average purchase prices is around $150. So if we see those going up or down significantly, what does that say about, how consumers are meeting those daily needs.
John Adams: (
As this changes, how does the risk change, what are the risks either to the borrowers or the lenders you've given these, shifts and this there's some way that can and should be addressed?
George Danforth: (
It really depends upon how risk gets sorted out liability in a particular BNPL arrangement. Today for the legacy BNPL's, the Klarna firms of the world, they're taking that, they're accepting that risk they're taking, which is why in their financial disclosures that, they're absorbing some 400 basis points of losses that they have to write off. I think in other models, with the credit card issuers, they understand their risk. We're seeing it split at three basis points of loss, which is nothing, but again, we're facilitating credit card transactions. So I think going forward it's in my mind, it's the risk really varies greatly depending upon what role you play in BNPL and what type of BNPL you're involved with credit card issuers are really good at assessing risk.
George Danforth: (
And I used to work for discover financial services and they knew it out to five decimal places on a daily basis. And so, I think the risk is gonna go up, bviously. I think the BNPL's that are accepting risk are gonna be absorbing not 400 basis points going forward, but five and greater. I think that is a real crossroads in the coming months and this year for those, for the BNPL's, I think it's an opportunity for the issuers, because I think that the people who should be assessing risk in underwriting consumers should be our best. And I think our best are the banking industry, the credit card issuers. I think they assess risk better than anybody. And I think that's really the future of BNPL, but I would say about debit, I worked in the debit industry for many years. I think it's an exciting opportunity, in debit, how you can modify, how you can deal with your accounts in such a way that you could apportion out right, and, and deal with effectively, doing buy now pay later, you can manage plans within your account structure itself. And I think that's a real, I would just say apparently, that I think that's a real opportunity that banks have.
Bryce Deeney: (
Yeah. I think consumer lending, I think there's a bureau that's built to help lenders make sure that they're following guidelines. That's a joke, so yeah, I agree with you, that, institutions who know how to underwrite consumer loans know how to look out for a consumer's best interests are following guidelines. There's people peeking over their shoulder, making sure they're following guidelines. I think that is the best path forward for American citizens to make sure that they're being lent to when they should be lent to, and the products are within the right structure and, means necessary. Like we just brought on the head of office of innovation at the CFPB into our company because we work with financial institutions to underwrite. As interest rates go up, you will see the basis points on third party FinTech who are trying to underwrite these themselves, go up and it's, you do kind of have to take a step back.
Bryce Deeney: (
A lot of the third party buy now pay later companies that are we see are back. Some of them are public, some are not, but, customer acquisition costs at all costs has been the market for the last several years. And as interest rates go up, public markets go down, private valuations, go down. You're gonna see a lot of tightening at the belt, especially if the bureaus get involved, even if they don't, these companies are still gonna be losing a lot of money and they're gonna have to pull back on their underwriting side. I think it's a perfect opportunity for banks to step in and say, "hey, we're your primary financial institution. We know you better. We have your deposits and your account balances and your history. We know that from a regulatory standpoint, we are actually underwriting you on credit, mortgage, HELOC everything else that we do we know you better than these third party fintechs. I think it's just a really unique opportunity, especially given the public market and the sentiment right now at the CFPB.
George Danforth: (
Yeah. I'm sure it's!......
Audience Member 1: (
Interesting. We talked a little bit about the part of the market and that's where a lot of focus is standpoint. When you think about the lower you, the lower part of the market, I'm concern families going, you know, in the right direction, especially the economy goes up. So I see the market capital, I'm all over, make a lot of, but I also see, you know, the lower part of help those families that actually need help and type information.
Hannah Gdalman: (
So on one hand, you know, buy now pay later can be a really great service. In that it provides short term liquidity, at little to no cost to the consumer, oftentimes to consumers who may not have as many other credit options available to them. We found that among all users in our survey, almost half reported subprime credit scores. So we also see this opportunity around if, and how we can incorporate credit building into buy now pay later. I think that's a big opportunity area. We have this large swath of consumers already using the service who are credit challenged, who are younger, maybe starting out thin credit files. How can we inject this credit building potential into this service. I also think there's this tension between the desire of merchants to drive up spending and the financial health of consumers, particularly these consumers who are financially vulnerable, who may be really carefully balancing spending and income.
Hannah Gdalman: (
Particularly if you think about households who are in the gig economy or other, other jobs where you don't really know exactly what that next paycheck is gonna look like. We found that 30% of the buy now pay later users in our survey reported spending more than they would have, had buy now pay later not been available to them. We asked a separate question about what alternative method of payment they would've used in the absence of buy now pay later 34% said they wouldn't have made the purchase at all. So we wanna be careful about making sure we're not, promoting these sorts of households, overextending themselves. How can we watch for that. How can we, be cognizant of that.
John Adams: (
George and also Bryce, this question would pertain to you too. What have you learned working with, banks and credit unions and rolling out BNPL? Well, what have you learned from working with them and where do you think there may be, not a misunderstanding, but what more couldn't, should they know about this product that, you know would make it useful for them?
George Danforth: (
Yeah, I'll be brief because I haven't worked a lot with issuers, primarily focused on building the enablement on the acquire side. So there's enough value for the credit card issuers to say, yes, it's out there in a substantial way, so we can invest in developing and pushing out our plans. But I will say that I am aware that credit card issuers do have a concern over the economic model for buy now pay later for credit card. If you think about it, do a thousand dollars credit card purchase on a buy now pay later using a credit card through splitit, for example. And so the merchant gets a thousand dollars and there's a thousand dollars hold put on the credit card, but, and only a $250, cause maybe it's four payments, $250. Capture now the credit card company is not losing $750.
George Danforth: (
The interest they would've earned on seven 50, but they are losing the opportunity to open to buy. Right. And that has economic value. If you think of other types of lending in the bank, in the lending industry, often times if you had types of lines of credit that you can get in a business perspective where there's some modest fee that you pay for the amount of the line of credit that you have, that you don't utilize. Right? So there's, there's a concept in banking lending for having an open line of credit that's being utilized or open to buy. That's not that's tied up, but not, but not being used. I do think that the economics will be rationalized. Okay. I think that, I would expect that visa MasterCard are, for example, you know the entities that will work with issuers to come up with an economic model that makes sense in conjunction and visa installment service and MasterCard installments, that's the right place for that to be, shouldn't be at organizations like me, it should be and needs to be done in a centralized way, coz we're not gonna go out and negotiate this economic model with one issue at a time.
George Danforth: (
Right. So I think that that will rationalize itself, but I am, we, I think the networks are aware and we're aware and others are aware that there is an economics, that needs to be adapted, for the credit card issues to make sure that value is recognized in conjunction with BNPL.
Bryce Deeney: (
Yeah. There's lots of learning here. I would say the first thing is just understanding the data that they already have. It's typically a learning that takes place doing really deep dives into core data, transactional data, and turning that into meaningful insights. I find that a lot of I'd say like mid-sized institutions have a decent idea, but they're not really able to break it down into demographics of like, why does this consumer choose Klarna or affirm or afterpay has a uplift splitit tidbit openpay, like there's so many opportunities out there. And then what types of products and services have we already cross-sold or not cross sold to this particular, customer. And then you also have the indirect customers, right from auto or mortgage or whatever products and services and how do we capture those is another like really unique opportunity that typically gets workflowed.
Bryce Deeney: (
The third is the underwriting model. Most institutions that I've worked with that, our team has worked with have very traditional underwriting models that typically they apply to like personal loans, signature loans, credit cards, But when it comes to buy now pay later, you need real time data to make real time decisions, 24/7. And that sometimes is a learning curve to get over for the incumbents, right? The traditional financial institutions. That's why we exist. But, I felt like that's typically a really interesting conversation to have with the head of lending of, how do you see utilizing buy now pay later underwriting tools to make fractional lending decisions that are fully automated without touching a lender? Typically that's a very long and, conversational, problem that we can help solve.
John Adams: (
And otherwise you mentioned you've worked in with all kinds of financial institutions of all sizes, but you also, before we came on mentioned credit unions, is there something specific to the credit union model that makes it a good fit or an interesting fit for buy now pay later?
Bryce Deeney: (
Cost of funds is, obviously something the fact that, primary financial institution for consumers is where we sit for our model. So I think just for equipifi specifically, we like working with institutions that have 10,000 to millions of consumers that say, hey, this is where I bank. Coz typically a credit union will have a lot of debit card users. Whereas you scale up in the financial institution realm, you're gonna have a lot of credit card issuers that chases everybody, it's typically they have massive volume on the credit side. So for us is primarily like where do your consumers bank? And the other thing on the data side I would say is institutions below 10 billion are trying really, really hard to increase their debit, spend institutions above 10 billion are trying really hard to increase their credit card usage or top of wallet usage. So because we're debit focused, there's a lot of credit units under 10 billion.
John Adams: (
We have a couple minutes left. Is there any questions from the audience? You mentioned you've done some research in BNPL. There's been some concern in specifically I'm thinking of the UK offhand regulatory concern about, consumers rapidly accumulating debt through the product. What are some of the things that you've learned about that issue and how can that be addressed? Regulatory moves you just self regulating from lenders? What are some of the ways to address that problem?
Hannah Gdalman: (
Yeah, I think the question of what are the financial health of, what are the financial health implications of buy now pay later is a really important one. It's a question that we can't firmly answer yet. So it's a question that I hope we collectively keep asking ourselves. I've already kind of mentioned these bright spots that we see around buy now pay later, the ability to spread diffuse the cost of a purchase, at little to no cost to the consumer, this opportunity area around credit building. We also found that very few respondents in our survey reported any sort of difficulty understanding the terms and the conditions of the service. So people seem to understand what they're getting into. On the other side of the coin, we have these concerns around overspending and that concern is only heightened.
Hannah Gdalman: (
When we think about the ability to take on multiple simultaneously buy now pay later loans, it can, you can take out one successfully make those four or however many payments and that can be a net positive. But what happens when you have three outstanding loans that all stack up on each other and they hit a payday that is a little lower than you anticipated it being, You can get into some really tricky situations fairly quickly. So those are the things we wanna really pay careful attention to. We also wanna pay attention to kind of who, you know, if we, it down, where are the costs falling? Are they disproportionately falling on certain demographics? So that's another thing we'll be wanting to watch. So at this point, I would just suggest and kind of urge lenders to keep asking themselves these financial health questions, take a financial health lens to this. How can we protect these consumers through careful underwriting from overextending themselves? How could we control loan stacking? And how can we ensure that going forward, the revenue model continues not to rely on consumer fees.
John Adams: (
Well, thank you, a great panel! Hannah, George, Bryce, thank you and enjoy the rest of the conference.