Square, Goldman, Capital One: Big names crash buy now/pay later party

ByKate Fitzgerald, Daniel Wolfe, John Adams

October 19, 2021 12:44 PM

Buy now/pay later — pioneered largely by fintechs such as Klarna, Afterpay and Affirm — has become a global phenomenon. The surge in demand has begun to draw the interest of card issuers, commercial banks and payment companies, which are also worried about the threat installment lending poses to their businesses.

Some are entering the market through acquisition or partnership. Others are adapting existing credit and loan offerings to the popular pay-in-four model. Whatever their approach, these nine companies are planting a flag in the BNPL market.

Synchrony

Synchrony Financial plans to offer buy now/pay later by the end of 2022 through a partnership with Fiserv's Clover point-of-sale business.

The BNPL product will build on other services, such as private-label loans and promotional financing, that the companies plan to launch early next year.

The move will expand the number of merchants in Synchrony’s eligible lending base, according to Florin Arghirescu, Synchrony's chief product officer.

“We’ll begin with revolving credit, but later next year we’ll explore expanding the service to include short-term loans, including buy now/pay later installments,” Arghirescu said in an interview.

Synchrony has relied on Fiserv for card processing for about 20 years, so the connection to Clover will build on existing integrations, using Synchrony’s application programming interfaces, Arghirescu said.

“Between our move to the cloud, investments in data, [application programming interfaces] and robust embedded finance tools, we’re like an 80-year-old startup,” Arghirescu said.

Square

Square struck a deal in August to buy the Australian installment lender Afterpay for $29 billion.

Square's Cash app has become its portal to many of its consumer and business-facing products. Adding Afterpay will give Square merchants access to a broader menu of financial services at a time when many of Square's rivals are also making big bets on BNPL.

Square, which obtained an industrial loan company charter in 2020, already offers installment lending, but it is a far cry in popularity from Afterpay, an Australian provider that is second only to PayPal in consumer use, according to C+R Research.

The acquisition will bring Square 16 million customers and an expanding U.S. business. Square plans to integrate Afterpay into its Seller and Cash app units, targeting small to midsize businesses. Afterpay's consumers will be able to manage installment payments directly in the Cash app, and Cash consumers will be able to find merchants and BNPL offers in the Cash app.

There are numerous potential synergies, given the importance of Cash to Square's overall business. Cash, which got its start as a peer-to-peer transfer app, now accounts for more than 80% of Square's revenue due to its use for bitcoin trading. Afterpay offers installment payments for both e-commerce and brick-and-mortar lending. Its North American sales have tripled in 2021.

Goldman Sachs

Goldman Sachs, the issuer behind the Apple Card, has also signed on last summer as the lender behind Apple Pay Later, the tech giant's planned buy now/pay later offering.

Details about Apple Pay Later are scant, but the service reportedly will work with any credit card, including the Apple Card launched in 2019 with Goldman, making the service both ubiquitous and a possible funnel for Apple Pay and Apple Card purchase volume.

Unlike BNPL giants including Affirm, Afterpay and Klarna, Apple Pay Later will work as easily online as in stores through Apple Pay’s broad acceptance footprint, whereas many installment lenders are not directly integrated with store payment terminals.

Citizens Financial Group

Many fintechs are rushing to provide the option to buy an item and split the payment into installments, especially as the pandemic has strained people's budgets.

But banking companies are also involved in this space, and Citizens Financial Group counts itself as one of the first. One of its key partners is Apple, which is notorious for having its own spin on retail and online sales. Citizens had to not only appease the technology giant, but also add more merchants at a time when more and more competitors were entering this market.

It also works with Microsoft as the lender behind Xbox All Access, a financing option for Xbox consoles.

“We didn’t create this overnight — we started in 2015 — and we’ve got a lot of investment, a lot of technology and thinking that went into developing this product set and it’s not something that’s easy to enter,” said Eric Schuppenhauer, head of consumer lending and national banking at Citizens.

Alliance Data

The private-label card issuer Alliance Data bought Bread, a buy now/pay later fintech, in 2020 for $450 million to jump-start its entry into the fast-growing installment lending market after decades of relying solely on traditional revolving credit card lines.

“Alliance Data is unique among other private-label credit card issuers in the way it’s already got deep point-of-sale integrations at many stores, so adding Bread’s state-of-the-art installment loan technology is relatively turnkey,” said Derek Joyce, Bread's CEO.

Bread provides the BNPL technology through Fiserv’s dashboard, and Alliance Data will originate and manage the loans, with merchant acquirers earning an acquisition fee for each sale.

Barclays

Barclays US announced plans for a buy now/pay later option for its merchant partners in April.

Working with the Chicago-based fintech Amount, Barclays is developing a white-label installment loan tool to offer alongside its cobranded and private-label credit cards.

“The buy now/pay later trend is very strong and growing, and it complements credit cards where people are looking to finance a specific purchase through installment payments,” Denny Nealon, CEO of Barclays US Consumer Bank, said in an interview at the time.

“As we saw from the e-commerce boom during the pandemic, consumers are still spending with credit cards. But particularly in travel, there are many use cases where people want different, more flexible payment terms for a specific purchase,” Nealon added.

Capital One

Capital One Financial announced in September that it would test a BNPL product with a subset of merchants and customers.

It will test the product this year with some existing customers and merchants, CEO Richard Fairbank said last month.

The McLean, Virginia-based company's entry into BNPL is notable given its earlier pushback against such products. Last year, Capital One banned the use of its credit cards for payments on all types of point-of-sale loans, though customers can use their Capital One debit cards and checking accounts for buy now/pay later transactions.

Fairbank took a shot at existing buy now/pay later providers, noting that they take substantial margins on each purchase and that the “elephant in the room is the sustainability of the merchant subsidy.”

American Express

American Express was one of the first major credit card issuers to begin offering installment loan options with existing card programs.

Amex’s Pay It Plan It feature rolled out in 2017, enabling customers to either pay off smaller purchases throughout the month, or split up purchases of at least $100 into equal monthly payments with no interest. Amex

extended the program to air travel

this year.

Citigroup

Citigroup introduced Citi Flex Pay and Flex Loan in 2019, giving customers the option to divide purchases into installments at the point of sale.

Customers pay off purchases in equal payments with no interest rate or fees, or convert recent eligible purchases into installments.

Citi’s installment loan balances were up 22% during the most recent quarter over a year ago, Citi’s chief financial officer Mark Mason told investors this month when discussing the bank’s third-quarter earnings. Most of Citi’s Flex Pay loans originated through digital channels, he said.

JPMorgan Chase

JPMorgan Chase rolled out installment loan options in 2019, enabling card customers to borrow a certain amount against their available credit through My Chase Loan, along with an offering that lets borrowers pay off larger purchases over time via fixed payments.

While JPMorgan does not have a buy now/pay later program that's available to consumers who lack Chase credit cards, that could change in the future, according to Marianne Lake, the company’s co-head of consumer and community banking, who spoke at the Barclays Financial Services Conference in September.

“We may not be the first mover in buy now/pay later, but we have the full suite of payment lending and commerce capabilities, and over the longer term I think that’s the bigger picture,” she said. “We have the customer base and distribution, and so we’re working on all of that. So stay tuned.”

U.S. Bancorp

U.S. Bancorp is also exploring the buy now/pay later market.

Executives at the Minneapolis company said they believe a BNPL option could complement its substantial payments business, which includes credit and debit cards, corporate payment products and merchant processing services. Payments revenue accounted for 26% of the $559 billion-asset company's net revenue in the second quarter.

“Buy now/pay later is a phenomenon we’re looking at, and we actually have some test cases underway,” CEO Andy Cecere said last month. “I do think it is a capability we want to pursue.”

Polo Rocha, Allissa Kline and Laura Alix contributed to this story.