Banking

How card issuers inadvertently fueled the buy now/pay later boom

Part of the recent U.S. surge in buy now/pay later loans may be traced to survival tactics credit card issuers adopted in the early stages of the pandemic.

Though card issuers generally didn’t tighten credit for existing customers, they clamped down on credit offered to new ones. This drove consumers to seek alternative financing options, according to Adam Hallquist, a principal with FTV Capital, which has $34 billion invested in fintech companies and other lenders.

“As consumers were increasingly participating in e-commerce [while quarantined], they needed applications and methods to make payments and they started to seize on other products like buy now/pay later loans,” Hallquist said during American Banker’s Card Forum this week.

Simultaneously, credit card issuers made big changes in their own rules around fees and rewards, encouraging consumers to expect broader flexibility in credit products, added Courtney Gentleman, senior vice president and chief marketing officer for payments at Synchrony Financial, another Card Forum participant.

“In response to lower consumer credit card usage, especially in categories like travel, card issuers responded to the pandemic by modifying or removing fees and changing the rewards consumers could earn based on usage. What has changed is that consumers now expect much more flexibility and personalization,” Gentleman said.

From left: Courtney Gentleman, senior vice president and chief marketing officer for payments at Synchrony Financial; Nubia Valenzuela, vice president of payment services at SchoolsFirst Federal Credit Union; and Adam Hallquist, a principal with FTV Capital. “Every other day we see a company raising money in this [buy now/pay later] space, or tangential to this space,” Hallquist said at American Banker’s Card Forum.

Concern about cash flow also fueled consumers’ interest in new ways to finance purchases, said Nubia Valenzuela, vice president of payment services at SchoolsFirst Federal Credit Union, a $26 billion-asset institution based in Santa Ana, California.

During the early stages of the pandemic, many SchoolsFirst customers withdrew substantial amounts of cash from their accounts through ATMs and at the branches, foreshadowing concerns around access to funds.

“Now buy now/pay later loans appear to be a great way to offer members cash flow control and additional payment options in a transparent manner, especially as more purchases move online,” Valenzuela said.

The rise of installment lenders like Affirm, Klarna and Afterpay has prompted calls for the Consumer Financial Protection Bureau to regulate them. The agency acknowledged that concern in a recent report, saying that buy now/pay later products have “continued to attract regulatory attention (as well as calls for further regulatory attention) domestically and internationally.”

The appeal of BNPL loans grew in part because consumers weren’t thrilled with traditional credit cards’ complexities to begin with, according to John Cabell, director of banking and payments intelligence at J.D. Power.

“Our recent research shows that consumers have been, on average, a little bit less satisfied with their credit card experience,” Cabell said. “Travel cards as a group have struggled from a consumer satisfaction perspective, despite all the efforts that issuers made to add new rewards programs and perks to make them more relevant.”

These factors created a perfect storm for consumers looking for alternative financing for purchases.

“Why are they using BNPL? Consumers are able to mentally compartmentalize those payments and think of them as a standard bill they’re paying every month,” Hallquist said. “Merchants find that when they offer BNPL options, they have higher average ticket prices and less shopping cart abandonment, and they’re able to increase their margins, even with the fees they’re paying the BNPL providers.”

Installment loans aren’t a new phenomenon, nor are promotional financing options for big-ticket purchases, said Synchrony’s Gentleman.

“What we’ve seen historically [in the popularity of promotional financing] is just the ability to take something and put it into bite-sized pieces,” she said. “That $1,200 patio set I can pay for in $100 installments or that $100 purse I can buy with four $25 payments is really appealing to the consumer when they’re thinking about that control and flexibility for where they are in their spend cycle.”

The upshot is that U.S. lenders must accept the fact that consumers now have permanent expectations of having greater control, flexibility, transparency and personalization around financing purchases, according to Hallquist.

“Every other day we see a company raising money in this space, or tangential to this space. It will be interesting to see the traditional credit card experience mold into the shopping experience as issuers potentially look to partner directly with major merchants,” he said.



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