At the same moment that banks and fintechs are piling into the buy now/pay later loan market, one in three U.S. consumers is falling behind on at least one installment loan payment, research shows.
Roughly half of U.S. consumers have tried a BNPL loan, and of those 34% have fallen behind on one or more of their installment payments, according to a survey Qualtrics conducted in August among 1,044 consumers on behalf of Credit Karma.
But late-payment rates that would set off alarm bells for traditional credit card issuers don't faze BNPL lenders yet because the delinquency rate on installment loans was slightly higher, at 38%, in December 2020, according to a similar study Credit Karma conducted late last year.
BNPL lenders' potential losses on accounts with late payments may be blunted by the fact that installment loans are short-term and revenues come from fees merchants pay, and these loans are driving strong volume.
Market share figures for the fast-evolving BNPL market are murky, but Marqeta, which provides virtual card-issuing services for BNPL fintechs including Affirm, Afterpay, Klarna, Sezzle and Zip, said its revenue related to this service rose 350% in the second quarter of 2021 over the same period a year earlier.
Credit cards are seeing healthy everyday use, but Fitch Ratings last month said U.S. credit card customers are keeping up with monthly payments and still leaning away from revolving balances. Prime credit card charge-offs fell to an average of 2.42% for the period ended June 30, 2021, the lowest quarterly average since Fitch Ratings began tracking performance in 1991.
Overall credit card portfolio performance showed little change in August, according to Keefe, Bruyette & Woods.
The split in the way consumers are handling BNPL loan payments versus credit cards suggests that for the moment, interest-free loans repaid in a handful of installments strongly appeal to consumers facing economic uncertainty as the pandemic lingers, said Daniela Hawkins, a principal consultant at Capco.
Banks can no longer afford to ignore the trend. Many traditional credit card lenders that stayed on the sidelines of the BNPL movement for the last couple of years suddenly are
"Originally BNPL products tended to be more acceptable to people living paycheck to paycheck, but as the concept spreads to luxury goods, electronics, beauty and hospitality, banks are recognizing it's something they need to explore," Hawkins said.
Although banks have been relatively slow to formalize their BNPL offerings, as the market evolves many have recognized this product is here to stay and they’re shaping their own variations on it, she said.
Now that a critical mass of merchants have made room for installment loans at the point of sale, it will be up to consumers to choose between an expanding array of financing options from banks and a phalanx of newcomers — and for the lenders to adjust to those choices as well as the demands of merchants and regulators.
Banks wade in
Capital One Financial is the latest credit card issuer to join the fray, announcing plans to test BNPL loans days after Synchrony Financial
Consolidation in the sector is underway. Square has
The challenge for all participants in the BNPL arena will be crafting products that are profitable and engaging in an increasingly crowded sea of options, Hawkins said.
“Merchants are happy to pay an origination fee directly to the BNPL lender if it helps them drive more sales, but it can be a tricky balance for lenders,” she said.
BNPL providers may offset risks by keeping the repayment terms of installment loans short and blocking further loans when borrowers miss payments, Hawkins said. But adding fees and interest rates when buyers default could invite pushback from U.S. regulators, who have not yet formalized BNPL rules.
“We’re already seeing an uptick in scrutiny around BNPL programs as consumers push the edge on how many BNPL programs they can get themselves into,” she said.
Global competitors lurk
Foreign companies that have established a strong BNPL business in their own countries are eyeing expansion into the U.S.
Scalapay, an BNPL lender based in Italy with offices in Australia and the U.K., this month raised $155 million in venture capital that it plans to use to expand into the U.S. in the coming months. The latest round, led by Tiger Global, brings the firm’s total funding to more than $200 million.
“We still see a lot of untapped opportunity to expand BNPL services in the U.S. by approaching it more from the side of what merchants want,” said Simone Mancini, Scalapay’s CEO, who developed e-commerce sites for merchants before co-founding Scalapay in 2019.
Mancini points out that some of the biggest BNPL players — including Sweden-based Klarna and Australia-based Afterpay — emphasize their brands over merchants’ own names.
“Klarna and Afterpay are interested in bringing consumers to their sites, but ultimately merchants don’t want to be disintermediated. They want to own the BNPL checkout experience through their own websites and stores,” Mancini said.
Scalapay works with 3,000 retail partners, including the high-end apparel retailers Decathlon and Calzedonia, where it uses an API connection to create a customized BNPL checkout process. Users are invited to offer basic information to qualify for a Scalapay-funded loan to be repaid in three equal installments with no interest.
Though the basic service looks like that of many other BNPL providers, Mancini says Scalapay’s approach enables participating merchants to extend BNPL offers through more channels, including social media. About 20% of participating merchants connect directly to Scalapay; others connect with Scalapay via API through about a dozen major e-commerce platforms, including Shopify and Magento.
“I think as the BNPL market matures, merchants want installment loans to be just another option within the checkout, without a third-party BNPL super-app’s name dominating things,” Mancini said.
One of Australia’s leading BNPL providers, Openpay, is planning to roll out BNPL services in the U.S. next month under the name Opy, going after a broad spectrum of borrowers with higher-ticket purchases, according to Brian Shniderman, U.S. CEO and global strategy officer at Openpay.
“Merchants told us what’s missing in the BNPL market is a way for consumers to buy an item they feel is just out of their reach — a higher level of luxury like a porcelain crown at the dentist or a better brand of tires,” Shniderman said.
Opy has developed a proprietary engine to tailor offers to each consumer, targeting middle- to upper-income consumers with flat-fee, short-term loans that fit with existing financial obligations, he said.
Earlier this year Opy announced an agreement to make its BNPL services available to 1.2 million U.S.-based Worldpay merchants through its owner, FIS.
Opy is also developing a path to offer its services to banks through the aggregator model, but details are not yet available.
“BNPL lenders are providing funds through merchants at the moment of the purchasing decision, with a transparent deal and a flat fee. Traditional credit card lenders need to find a new formula that provides a simpler payment plan at the beginning—not the end—of the transaction,” Shniderman said.
