The new credit card acquisition channel

OBSERVATIONS OF THE FINTECH SNARK TANK

Americans are quickly embracing Buy Now, Pay Later (BNPL) services. According to research by Cornerstone Advisors, the percentage of Gen Zers making purchases with BNPL plans increased sixfold between 2019 and 2021. Millennials’ use of BNPL has more than doubled to 41% over the same period, Gen Xer use has more than tripled, and even baby boomers have sprung into action.

Overall, consumers made nearly $100 billion in retail purchases in 2021 using BNPL programs — four times the amount of $24 billion in 2020.

Does BNPL Eat Credit Cards?

There are reports that it is gobbling up credit card volume.

(In a subsequent tweet, @mdharrisnyc said: “Someone told me this based on a private off-the-record dinner I didn’t attend.” A tweet of mine asking Harris about the volume claim went unanswered.)

This isn’t the first time industry observers have stated that credit cards are dead or dying. For more bad forecasts, see:

  • “The painless death of credit cards continues”, Motley Fool, March 2011
  • “The Slow Death of Credit Cards”, Motley Fool, April 2013
  • “Credit Card Death Is Near – Here’s How You Can Take Advantage,” Nasdaq, October 2013

Credit card death reports are greatly exaggerated

However, according to the Nilson report, the top 100 U.S. issuers of Mastercard and Visa credit cards generated purchase volume of $1,492 trillion in the first half of 2021, up 22% from the first half of 2020.

A number of publishers also saw an impressive increase in the number of cards in force during that period. The largest publisher, Chase, with more than 111 million cards, saw a 14% increase. Goldman Sachs, the publisher behind Apple’s card, grew the number of cards issued by 48% and ended the first half of 2021 with $5.2 billion in outstandings, a 128% increase.

It wasn’t just the old guard that saw growth. Upgrade, founded by former Lending Club CEO Renaud Laplanche, broke the top 50 with $416 million in outstandings — a 756% increase from 2020 — and 217,000 cards issued, 678% more than the previous year.

So what are (and were) the credit card doomsayers missing?

  • Generation shifts. In 2013, the oldest millennials — who are now 26 to 41 years old — were barely 30 years old. Their credit scores were not attractive to many card issuers back then. However, as their life stages changed, so did their credit scores. Just as important, however, was the sheer number of millennials plaguing the planet. While there was certainly a shift toward debit card purchases, the influx of millennials into the market boosted credit spending.
  • Economic circumstances. How quickly we forget how bad the economy was after the “heap” of the 2008-2009 financial crisis. Reduced credit card spending and consumer debt shouldn’t have been unexpected — and it certainly wasn’t a sign of the impending “death” of credit cards.

Just as observers misinterpret trends toward debit card spending in 2013 as a sign of credit card decline, current proponents of BNPL interpret the long-term impact of buying now and paying later. According to Capital One co-founder and managing partner at venture capital firm QED Investors, Nigel Morris:

“BNPL is here to stay. There is an inexorable trend towards digital and it will only increase. But many people exaggerate the cannibalization of cards by BNPL.”

Buy now, pay later is a credit card acquisition tool

However, credit card issuers should not rest easy. As I wrote in Buy now, pay later: The “new” payment trend that generates $100 billion in sales:

“What’s different – ​​and important – about BNPL is its place in the customer journey. Payment options usually come at the end of the trip. Current BNPL services influence consumers’ choices for products and providers earlier in the journey.”

Morris from QED agrees:

“BNPL is an acquisition channel. The acquisition costs are low and BNPL providers have their own data in position to offer other data-driven services.”

However, BNPL is not just an acquisition channel for traders. It’s also a credit card acquisition channel, although some may not see it that way. American Express CEO Stephen Squeri recently said:

“Buy now, pay later is not really a competitive threat for us. It is aimed at debit card issuers. As a customer acquisition vehicle, this is not the game we play.”

Squeri got some heat for that comment on Twitter from the BNPLiterati, but he’s not wrong. BNPL is not suitable for all cards. Most Discover cards, yes. Most Amex cards, no. Capital One Platinum secured credit card, yes. Chase Sapphire Rewards, no.

Many current BNPL users may not be attractive candidates for issuers like Amex. But when their credit scores are attractive to issuers like Amex, BNPL providers will have an in-depth history of their purchase and redemption activities, making it easier for them to offer credit cards with the right prices and features.

Buy now Pay later Businesses are the real threat

BNPL does not threaten credit cards. The real threat: BNPL companies will crowd out established credit card providers.

Why? Buy now, pay later businesses establish: 1) a deep history of young consumers’ purchase and refund business; 2) relationships that avoid revolving debt, high interest rates and punitive fees; and 3) symbiotic trade relationships.

BNPL is like training wheels for credit cards. It gives its users entry levels of credit. When BNPL customers demonstrate that they need more credit – and the ability to pay back – BNPL providers will be there with full credit card offerings.

BNPL companies such as Klarna and AfterPay are “credit card” issuers. Distinguishing between short-term credit (ie BNPL) and longer-term credit (credit cards) is pointless. Credit is credit. As Morris of QED says:

“Ultimately, it’s still loans – and to succeed, the BNPL players will need longer-term credit. It remains to be determined how new entrants will develop the heuristics needed to manage credit.”

Banks ‘Buy now, pay later’ Uselessness

The reaction of many established credit card issuers (with the exception of Amex) to the BNPL trend is the jump on the bandwagon. It’s a pointless response for two reasons:

  • They are offering BNPL to the wrong people. Offering BNPL opportunities to the entire population of credit card holders is a mistake. Many credit card holders don’t need BNPL capabilities (45% pay their bill in full each month, and only 27% usually have a balance).
  • They do not have the ability to assist traders. Afterpay plans to enable its trading partners to advertise on the BNPL firm’s app to boost their promotions, products and offers. Klarna is building a “super app” for shopping to support its commerce ecosystem. I can’t think of a publisher in Nilson’s top 100 that can come close to these capabilities.

To be fair, there is an opposing view here. Alex Johnson, Director of Fintech Research at Cornerstone Advisors said:

“Banks can argue to merchants that the big BNPL companies are bad partners because they are selling back to them the customers they got from the merchants, which is not a good deal. Banks could be better partners by white labeling their BNPL offerings.”

That may be, but most bank issuers don’t have the scale to work directly with a significant number of merchants and will have to rely on Visa or Mastercard for that. And as long as there is exchange, the networks are the enemies of the traders.


Want to know what’s going on in the banking industry? For a copy of the Cornerstone Advisors report What will happen in the banking sector 2022: recovery from the income recession?Click here.

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