Capital One testing buy now / pay later option to battle Affirm

Capital One Financial will test a new buy now / pay later service as consumers flock to the options that let them split up a purchase and pay it off over time.

The company will begin beta testing the product with some of its existing customers at select merchants later this year, Chief Executive Richard Fairbank said Monday at an investor conference. He declined to share more beyond saying the new offering would not be linked to the firm’s private-label credit card business.

Buy now / pay later options – with names such as Afterpay and Affirm Holdings – have swelled in popularity in recent years, especially among younger consumers looking to pay off purchases over time and often without interest. The offerings make most of their money by charging merchants a fee each time a consumers uses the product at checkout.

“We’re watching this product closely and certainly not taking this growth lightly, especially as many of these buy now / pay later providers form new financial relationships with a large number of consumers and merchants,” Fairbank said.

Capital One has been eyeing ways to juice loan growth in recent months. The McLean, Virginia-based firm has spent more on marketing in an effort to add new customers and has begun gradually increasing credit lines for existing clients. The lender’s latest move in the buy now / pay later business marks a bit of a reversal, though: Last year it barred customers from using Capital One credit cards for buy now / pay later options.

“Competitors are amassing at the border, and it’s possible they will bid down the level of the merchant discount,” Fairbank said. “As there is a drop in margins, it could alter how the business works – who pays for the loans, and which customers ultimately choose the product.”