Track 3: Buy now, pay later: Riding the BNPL trend

Split Payments vs POS Lending: Which BNPL Solution is Best?

Transcript :

Kate Fitzgerald (00:10):

Welcome to the Track three buy now pay later. Writing the BNPL trend. This is the most fascinating of all the sessions you've chosen. Well, and one of the reasons is even as we sit here talking, Buy Now Pay Later later is probably changing even the very definition of Buy Now Pay Later is an interesting one. Everyone's heard that it's been described as like layaway, but that doesn't really cut it for what it has become today. And I was always interested to learn as we keep doing more and more stories about it as how long some banks have been added. And since you guys can see our names and titles, I'm just going to jump right in and I'm going to turn it over to Agora to talk about Citizens Pay. Tell us about your role and the scope of your job and a little bit about the background. If Citizens Pay with Buy Now Pay Later.

Gaurav Sethi (01:07):

Yeah, thank you. So yeah, Gaurav Sethi I am the head of product and strategy for Citizens Pay, which is a Buy Now Pay Later FinTech within Citizens Bank. And my role, is when you talk about product and strategy, it's figuring out what are the verticals and business sort of opportunities that we have to create a differentiated product and value prop relative to everything else that's in the marketplace. So you guys probably know a lot of Buy Now Pay Later, a competitor of ours, most of them are in the small dollar short ticket type financing. So things like, or companies like Firm Klarna, Afterpay, zips so on and so forth. Our strategy at Silicon Pay is different. We have been in this business for about seven, eight years now, since 2015. Started with financing the iPhone upgrade program for Apple. And since then we've developed a very differentiated product and platform to provide solutions like that to a lot of our enterprise clients. So that's kind of in a nutshell who I am and what Citizens Pay does.

Kate Fitzgerald (02:29):

All right. Mia, can you give us a little perspective on your role and how US bankers approaching Buy Now Pay later?

Mia Huntington (02:36):

For sure. So we haven't been at it quite as long as you have, but I think what's kind of interesting, and you started with this, Kate, is where the industry is going at in this area is changing and it's changing minute by minute. So we often think about buy now pay later as those shorter term loans. But the reality is, although the FinTech started this, banks are actually really, really well positioned to be in this space. So you know, think about all of the ecosystem that goes into a Buy Now Pay Later loan. It's really at its core what banks do already today. It is lending, it's acquiring it's card issuing, it's money movement, it's all of those things that it takes to build that ecosystem of lending. It's just got a really digital look and feel and layer around it. And so as a result, banks are really well positioned to do it. Fintechs, I would say, kind of built the use case and got the movement going now. Now there's a bit of a changing of the guard, I would say. There's some challenges that the fintechs are certainly facing and banks are really, really well positioned to enter this space. And you've obviously figured that out eight years ago, but I think a few other banks are starting to catch up.

Kate Fitzgerald (03:55):

So one of the themes was that we were going to just talk about a little bit is the definitions of Buy Now Pay Later. Again, that's also evolving, but there was a concept of split payments versus installments and is it worth diving into this or should we, does it matter or what do you think?

Gaurav Sethi (04:17):

Yeah, I think it matters from a banking perspective, maybe not so much for the customer because for the customer consumers, they are trying to find out how I'm going to pay for this thing and pay for this thing in a responsible way that I can budget for, say for or pay for without falling into debt. So fundamentally for consumers and customers, that's really what we want to solve for. But from a banking perspective, and we're in the midst of bankers, the EC unit economics of a short term low dollar loan versus a medium to a larger ticket item has different unit economics and it attracts a different type of customer and so on and so forth. So from that perspective, it does matter. And so what Citizens has done, our strategy is we are not so focused on the really low dollar financing, right? Because it attracts a very specific segment of the customer base, mostly in the low Paco or in a lot of cases actually, no Paco. And so when we think about it, we are thinking about it from a lifelong relationship building from our customers. And so we want to build relationships where we can deepen into other relationships like deposits or when they have needs for mortgage and so on and so forth. And so it's important for us to figure out not just the unit economics of the loan itself, but then the type of customer we're bringing in and the longevity and the relationship building that we can do with that customer,

Kate Fitzgerald (06:03):

Which is completely different than a FinTech, which is starting with the loan and maybe then expanding out into other financial services sort of reach. Mia, what, do you have any comments on the definition or the niche that US Bank is approaching? Yeah,

Mia Huntington (06:22):

I think we've started with it, which is at its core what you're trying to do is make sure that the payment is affordable for the consumer. So it's just another way, it's a different way to pay. You might pull out your credit card or your debit card, and in this case you're looking for an alternative way to pay. And there's another variation of it, of course, which is the card based installment, if I can put it that way. So something that's attached to your card if you're an American Express card holder or otherwise, we have a product similar at US Bank where you can take a transaction that you've made on a credit card and you can turn it into installments. Even that's sometimes called buy now pay later. So it kind of really lumps everything into one category. And so I think part of the strategy is understanding who's the customer you're serving, and for the most part, the real customer that you're serving in this environment is the merchant customer. You're starting with them, you're giving their consumer an affordable way to pay, and the benefit to the merchant is really increased sales, higher checkout rates. And so that's really where you have to start. Who are you trying to serve is at the core of what you would end up deciding as your strategy if it's higher ticket, if it's lower ticket. I think that's really, really important to the definition.

Gaurav Sethi (07:47):

I was partly kidding last year when I was in another panel that credit cards essentially are buy now pay later. You're buying with a credit card and then paying either in part minimum payments or whatever, but paying over time. And so the concept of lending and buy now pay later isn't unique. I think what's changed is the experience most of the time it's a fully automated digital experience at checkout and the structure of the payment, because it's installments, gives the transparency to pay in a very defined period of time, which is important for consumers. So that's sort of the thing that we have to always keep in mind. To your point, who are we solving this for? And if consumers are looking for a better way to pay, that doesn't get them in trouble. Economic trouble from a budgeting standpoint, this just feels like a better way to pay. Now you have to do it in a very responsible way, and that's something that I know the CF and regulators are looking at very closely vis-a-vis what others are doing in this space.

Kate Fitzgerald (08:59):

Well, how many people in this room, and I'm going to ask you to raise your hands, would say that you feel like you have a really good grasp on what Apple Pay later is a new product that was rolled out recently, how many people feel like they could take? So not many, but it has definitely entered the space and they are actually taking yet a different approach to it, which is, I've heard a couple of different theories on the one hand because when Apple gets involved, they redefine an industry. And number two, you just alluded to the CFPB, they have to, they've announced that they're going to report the, they're going to adopt regular practice of reporting all these transactions to the CFPB, which they're right now isn't any standardized approach. And third, they're actually coming at it from a position of they have a really low threshold, a thousand dollars, which many buy now pay later now go up to longer terms and bigger amounts, which if they're starting to redefine the market that's worth paying attention to. It has also been suggested that maybe they're not in this to compete with the rank and file fintechs. Do you have any I, I'd like to get your reaction to where you think Apple Pay later has commanded what your theories are about what they're going to be doing?

Gaurav Sethi (10:22):

So Apple Pay later is evolution of what Apple's been doing with the Apple card, which is to be in the payments ecosystem of the customer. A majority of when you just purely look at frequency, a majority of transactions happen below a thousand dollars. You look at your debit cards, it's usually under 150. Look at your credit cards, it's typically under a thousand dollars. And so they're looking to solve a technological sort of opportunity or challenge, which is how do I make the majority of transactions simpler within my ecosystem? I don't think they're trying to be a core lending platform. And so for a lot of both retailers and customers or consumers who have bigger needs when they're trying to get a home improvement project done or a dental treatment done, or there are lots of other areas where the thousand dollars cap just doesn't cut it, that doesn't solve a need, but those from a frequency standpoint don't happen very often. How many times do you go by a $3,000 tv? How many times do you do a dental treatment? So the frequency is low. So I think what they're trying to do is get the maximum frequency possible within the everyday use of I'm pull out my card or my phone and transact using Apple Pay Apple pay later and not try to be a lender for those high ticket items.

Kate Fitzgerald (12:03):

Excellent point. Mia, you being a bank, I would think you have a different perspective like Citizens Pay, but yet maybe degree. Did you see Apple Pay later as a threat or not a threat?

Mia Huntington (12:19):

Yeah, I mean I think this first iteration of it is not a major threat. If you think about how many people actually carry Apple devices, I know there's a lot, but it's not as the majority, how many people are actually using Apple Pay itself. I think that's another play for Apple, quite frankly, is getting you used to actually using your wallet that they haven't had great adoption of, but they also have signaled that they're getting into higher ticket, longer term loans eventually. So I think they're kind of working out the kinks with the smaller dollar ticket and probably going to move up market and quite likely probably moving into deposit account space. We know that they've got a really nice lucrative savings account that's available right now. So I think just generally speaking, it's one to watch because more and more they wake up every day thinking about how they're getting deeper and deeper into the banking system. So I wouldn't discount that.

Kate Fitzgerald (13:15):

Interesting. Excellent points. I wanted to ask about how credit card issuers originally viewed the fintechs, Buy Now Pay Later. At first, these are teenagers buying t-shirt, buying t-shirts and tennis shoes, and we're a bank and we have credit cards and our audience is completely different. That was about two or three years ago. Do you think that that perspective has changed the banks have anything directly with fear from the big fintechs?

Gaurav Sethi (13:42):

Yeah, actually, so before I joined Citizens, I was at JP Morgan. I was the head of innovation for the card business over there, and we had just launched my Chase plan and my Chase loan, which are essentially buy now pay later or installment products that you can use within your card. And even back then Amex already had Planet, which is again a similar product you talked about. I think US Bank has a similar product city does now. So everyone even back then, 3, 4, 5 years ago was looking at the space and saying this is a emerging trend. Consumers are wanting an easier sort of predictable way to pay for things internationally. By the way, that is the only way a lot of countries and consumers in those countries pay for. But I think the difference is FinTech have underwritten much, much deeper relative to credit card companies, issuers.

(14:47)

And so while most consumers like the appeal of Bator when it comes to sort of installment or split payments, what issuers are not willing to do is go underwrite to the extent that the FinTech have been underwriting, which is going to underserved markets, no FICO score segments and things like that. And it's obviously risky going there and we are seeing some of the effects of that now with a lot of fintechs sort of having some struggles with making delinquencies with delinquencies going up. And so those sorts of things. So I think buy now pay later and installments is here to stay. I think that is not going to be a debate. Issuers are going to adapt it more and more. It's just sort of what is the credit appetite of the different issuers. Okay. Sort of the differentiation.

Kate Fitzgerald (15:43):

I think he handled that pretty broadly. I'm going to cut to Mia for a different question. The question is reaching consumers As you have this product, you have maybe, I don't know how far you've developed the various channels that you can use, but you can go through the merchant are we've seen some coverage recently on using digital wallets so that something kind of like how Apple pay later, but there are many other types of digital wallets and there are other channels, there are channels within your own bank. What are your thoughts on where this is evolving and are you guys working on trying to penetrate more deeply?

Mia Huntington (16:22):

Yeah, I mean I think generally speaking, obviously the channels are available as you've discussed, but for the most part everything starts with a merchant. So you've got to get the merchant either on their website, in their place of business while they're doing the home services offering financing to the consumer that's buying from them. So really everything starts with the merchant. There's nothing from our perspective where we're going directly to the consumer for the specific product that I'm working on, but we do have X extend pay at US Bank, which is very similar to AMX planet. So there are variations. And I think when you think about all of those things together, it's all about the changing dynamics of how consumers want to transact. And that's really what this is all about there. There's a lot of nuances even in some of where I was talking about there, there's small nuances and you might think, why does this matter?

(17:20)

Why does a consumer want to transact this way? A huge part of it is assessing in real time. And you mentioned it, I have an emergency repair to my HVAC system. I wasn't expecting to spend $6,000 on an air conditioner this month. It's not that I don't have a credit card. It's not that I'm not financially responsible. I just didn't know my air conditioner was going to break this month. Do I put it on a credit card and let it revolve at 20 plus percent interest or do math that's presented to me quickly that lets me assess in real time. I can afford this, right? I can afford to pay $150 a month for the next several months. So I think those nuances really, really matter. And it goes to your point earlier about responsible payments. I think there's a lot of media and headlines right now about how irresponsible this is. And the CFPB certainly as you mentioned, is weighing in on this topic. And I think that's kind of where I would go with the nuanced way that of looking at it. Okay.

Kate Fitzgerald (18:25):

Well those channels still, some of them are very new. You said it starts with merchants, but it's also starts with consumers and convenience. And so the role of the financial institution is kind of different than other products. Would you want to talk about that URA about, and I think you actually at Citizens, you guys have some really interesting, is it bundling that you

Gaurav Sethi (18:53):

Mentioned? Yeah, so our value prop is different. So when we talked about buy now pay later as a category compared to most FinTech, I would say actually all FinTech, they're presenting another tender type in the merchant's ecosystem. So you can pay with your credit card debit card, now you have a PayPal button, now you have a Klarna button and so on and so forth. So what the merchants are starting and the retailers are starting see is I'm not quite seeing the same amount of sales lift that I thought or was promised. And all I'm seeing is a sort of shifting of the tender. So I'm getting 10% less payments going through the credit card rail or the PayPal, and now I'm getting a slightly more increase in sales in car nine and things like that. But what we've done really is when we present our solution to retailers, we always say, think of us as your marketing and strategic consultants and not a tender type.

(20:11)

And so what are the problem statements you're trying to solve for? And obviously everyone wants to get more sales, but how do you just want a tender type to do that or are you trying to do other things to bring more customers in and keep more customers for sort of repeat use? And so when I talked about bundling, we have a few different products where we bundle product and service. Xbox All Access Pass is an example of that where the only way you can get the bundle of the Xbox with the gaming pass is through Citizens Pay. And that's offered at a few different retailers. So we partnered with Microsoft but then had that product available at Best Buy and Target and GameStop, et cetera, et cetera. So that's one way of saying, okay, by bundling things, we're presenting a unique value prop, but we are also enabling bringing this product over to other retailers.

(21:13)

And so now we are really acting as a strategic partner to the retailers. Same sort of thing. What we did with Apple, we've now done with Best Buy where we've brought sort of our upgrade motion for MacBooks. And so if you buy a MacBook at Best Buy Now you can buy it in installments for three years, but then you can return that MacBook in three years and get a brand new one and keep paying that installment if you want, or you can just keep it. So they're different options and those kinds of options allow for Best Buy to position this as a cheaper, cheaper way to not just get the initial product, but then to bring them back three years from now you want and you have MacBook and we are able to do that.

Kate Fitzgerald (22:04):

This is a very different bank role for a bank to play. You're playing a role in strategic marketing, business planning, you're getting closer to the merchant and it's far more than just routing a tender, right? Oh, we're a bank, we're like the switch. We're not a switch anymore. And in doing so, the customizing these approaches, do you feel that, are you opening up new opportunities or are you trying to keep up with the demand? Mia, do you feel like you're expanding the pie as part of

Mia Huntington (22:35):

This? I do. If you think about it from the perspective of what Gora just said, you're bringing value. We often talk about things in banking as they're commoditized processing and it tender types, et cetera. And I think this becomes more of a more holistic play with that business. How are you enabling that business's success and that business's ability to grow the best Buy MacBook example is a great one. Now that I'm invested in this and I've been able to make my monthly payments of $150 and the next new MacBook comes out, I'm more inclined to say, yeah, I can keep paying $150. I'd like the new one, please. Here's my old one back. So I think it's just changing the dynamics too, of how consumers expect to interact with businesses and the merchants. And I think the bank bringing these solutions to merchants adds value to the conversation and less commoditization.

Kate Fitzgerald (23:35):

So as we get ready to wrap up a couple of factors that might change things I want to get your perspective on. One is the economy, the tightening economy. There's a point of view that a lot of this stuff that happened during the pandemic, people had more money, they weren't spending it on certain things. So it became not pay later became more of a channel, but at the same time there was, now we have higher interest rates, we have people, the pressure is coming from different directions. What do you see happening next in terms of, do you think we're going to see consolidation? Do you think it'll continue to expand at the rate that it has or what's going to happen with competition?

Gaurav Sethi (24:18):

Yeah, so I would answer that in two different pillars that I think of. There's the macro conditions that are happening with the economy that are impacting all banks, but fintechs even more so in terms of funding sources and liquidity and capital constraints and those kinds of things. And so to that point, I do feel like there's going to be a lot of consolidation. Not everyone's going to come out as a winner, which typically happens in every emerging business. There are a lot of really cool slick technologies out there, but not necessarily the most fundamentally sound business models. And so consolidation helps with that from a economic standpoint for the consumer, what has shifted right with the recession slash I guess emerging recession or what are you going to call it right now, you're going to need more help in terms of how to budget for things and pay for things. Most people don't necessarily change dramatically their everyday life of what they need to spend on and the daily type of things that they have to deal with. But when budgets are tighter, I think things that are buying off pay later that help with responsible spending and buying actually gain traction. So I think this is going to continue to.

Kate Fitzgerald (25:58):

So you're saying that the economy might create more opportunities for roles for banks to expand their role. Mia, anything to add on that one?

Mia Huntington (26:06):

I would agree. I mean, I think a lot of the fintechs started when money was very, very cheap. And so it made the economics a little bit more viable even though they still weren't making money. Now it's not so much, it's really difficult for the fintechs to get the balance sheet and the funds at a rate that's palatable. So I think you're spot on. They'll be consolidation, they'll be winners and losers for sure, and the whole ecosystem. And then as you said, from a consumer perspective, things are getting more expensive and this is a way to make purchases affordable, one of the ways to make purchases affordable and do it in a really responsible and measured way, in transparent way. So I think the demand has been created. Consumers love it. I don't see that retracting in any way. I think it's become a little bit more of a norm. Maybe it was a niche product at the beginning when it came out, and now it's kind of out there in a little more of the norm.

Kate Fitzgerald (27:03):

And finally, the potential changes from a regulatory perspective. We've been hearing about this for a long time. The market inquiry started in late 2001, I think it was when all last year the CFPB put out a couple of reports, but we still don't know. We know that we mentioned earlier that now that apple's in this business and they've established they're going to be reporting to the consumer, to the credit bureaus that may, they're potentially setting a new standard. And if that happens, how will that change the landscape? And we'll close it out with your final comments on potential effects of the CFPB taking a bigger role here.

Gaurav Sethi (27:46):

Yeah, I think the CF P'S role is consumer protection. And as citizens, actually we've always reported to the bureaus as I think can, don't quote me, but I think most larger banks do. I think the fintechs were the ones who are selling these, what we call paying for products, the biweekly and paying for installments that were not reporting to the bureaus. And so the pressure's going to be on them. I don't know when the CFPB is actually going to come out with sort of regulation around it, but I think that's sort of where they're circling around is the consumer. The fact that bureaus don't know, and by implication the lenders don't know how much total debt a consumer has is problematic, right? It's problematic for lenders because they don't have the full visibility, but it's also problematic, quite honestly for the consumer themselves because they take on more debt than they are able to repay, which ultimately hurts them as well. So I think this is a step in the right direction, a direction that we as banks typically have always followed. I think the FinTech will have to follow.

Kate Fitzgerald (29:11):

You have an advantage there, Mia. Do you feel like the CFPB is going to make a big, would it have a significant effect on US bank's current? I not pay later

Mia Huntington (29:21):

Offerings. No. I mean we're similarly, these are regulated loans just like any others are. The definition of buy now pay later matters here because that's really what the CFPB is focused on. Is those paying for kind of gray area? Yeah, smaller ticket. A lot of the noise that we're hearing has nothing to do with a regulated loan that's getting presented to the bureaus today. So no difference there. I think there's likely to be regulation. I think we would welcome it, and then it's a level playing field for everybody involved. But at the same time, I think the credit bureaus have work to do to modernize to get themselves able to take in that reporting and to assess it properly. We're, we're

Kate Fitzgerald (30:10):

Going to wrap it up because we're out of time, but it's certainly, it's such a dynamic area that it's sort of like to be continued. And I hope we'll continue this discussion in other forums and thanks very much.

Gaurav Sethi (30:22):

Thank you.