Many of us may have heard the term buy now / pay later for the first time in the last few months, but the concept is not new. For example, some of us may have used private-label installment credit to buy a pricey fully adjustable mattress or a giant high-definition television. We did it despite the clunky application process for in-store credit approval because it was a good deal to get a zero-interest stretched payment period.
What has happened in the last few years is that zero-interest lending has spread widely, thanks to fintech firms which now offer it for buying almost anything – including lower ticket items. They offer it online and have made it convenient, quick and seamless via an app or digitally. Stuck at home for months and forced to shop for everything online during COVID-19 lockdowns, consumers discovered they liked the convenience and affordability of buy now / pay later, and gained a stronger appreciation of debt management, fueling more growth in this sector.
Recently, Discover invested $ 30 million in Sezzle, Apple entered the market through a partnership with Goldman Sachs, and Square spent $ 29 billion to buy Afterpay – all signaling that the buy now / pay later market is also drawing the attention of payments, tech and finance giants.
Buy now / pay later is the repackaging of credit. When somebody buys something and pays later, they’re borrowing money, even if for just a few months. As everybody knows, there’s no free lunch, and somebody must pay interest for the money being borrowed. In this case, the merchants shoulder the cost, paying fees to buy now / pay later providers. For the merchant, it’s a way to attract a wider swath of customers who need budget-friendly financing terms. Users tend to be younger than credit card users and more likely to be part of underserved communities, according to a poll conducted by Morning Consult.
While it’s been gaining popularity recently in the United States, the service has been popular in other parts of the world for more than a decade. When I travel in Latin America, almost every time I use my credit card in a store, I’m asked how many installment payments I’d like to make. In those countries, the banks have incorporated installment loans into their credit card offerings and work hand in hand with the card networks and merchants to offer a slick and widely accepted product.
It’s time for US banks to follow suit and take an offensive stand on buy now / pay later. While fintechs may have taken the lead in popularizing the product, there’s no reason banks should sit on the sidelines. While some bank executives might be worried that it’s going to cannibalize credit card balances, the data suggests that it’s more likely to add a new client segment into the mix.
Morning Consult’s poll showed that while 27% of US adults said they used buy now / pay later services in July, most of those didn’t have credit cards. It can coexist with credit cards and help banks expand their consumer credit portfolios. In addition, it can act as an initial credit-type product. Customers can then move into a line of credit with installment features and finally mature into a traditional credit card product.
Some banks have already entered the arena. JPMorgan Chase and Citigroup are now allowing their credit card customers to select installment plan options for post-pay purchases. When you’re on your computer or banking app looking at your most recent credit card statement, you can click on a purchase – typically larger than $ 100 – and choose to pay it in monthly installments.
Even though credit card holders don’t pay the regular interest for the amount not paid at the statement’s due date, they must pay a fee for the service. That fee could be eliminated if banks reached agreements with merchants that will pay the buy now / pay later fees just as they’re paying fintech companies. Or better yet, they can rely on Visa or Mastercard to make those agreements and allow the bank to make the buy now / pay later offering for select merchants. Visa is already doing this in Canada and has been testing a pilot program with Commerce Bank in Kansas City, Mo. Banks can also go directly to merchants and finance their sales plans, helping them offer installment options to their customers.
The growing popularity of buy now / pay later has already attracted regulators’ attention. In a blog post Last month, the Consumer Financial Protection Bureau warned consumers not to overextend their finances even if the interest-free plans look enticing. And as American Banker reported soon after, several experts saw the warning as a sign of future regulatory action from the CFPB.
But for banks, regulation could be good news, as it would help level the playing field with fintechs. The CFPB is typically worried about consumers’ credit exposures, pricing transparency, terms and conditions. Banks, which are better at risk management, can play a significant role in tracking consumers’ behavior.
Many have hypothesized that the reason this kind of lending is getting so much traction is that millennials and members of Generation Z distrust credit cards. If true, banks can also tap this skeptical demographic with offerings that are not traditional credit cards, but installment plan cards. On top of that, there’s clearly some demand among wealthier, older clients too. Peloton bikes, those ubiquitous home-exercise gadgets that filled homes during the pandemic, have accounted for almost 30% of one buy now / pay later provider’s recent sales. If banks do nothing, fintech firms will develop deeper ties with a good segment of banks’ clients potentially stealing them away for good.
Buy now / pay later is here to stay because consumers and merchants like it. Banks have an opportunity they shouldn’t ignore – to provide credit to consumers in a different way and to expand their portfolios with millennials and Gen Z that want to be serviced digitally, with the same speed and convenience online as in-person.
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