Why is JPMorgan banning credit cards for BNPL payments?

Chris Ratcliffe/Bloomberg

JPMorgan Chase plans to block consumers from using credit cards to pay for buy now/pay later loans from third parties, drawing fresh attention to a group of lenders that has grown rapidly in recent years while attracting regulatory heat and credit risk worries.

As of October 10, the bank will no longer allow Chase credit cards to pay for installment loans from non-Chase apps, including firms like Klarna, Affirm, Afterpay and dozens of others.

The bank also told its cardholders to update payment methods for any third-party BNPL provider or risk missed payments or potential late fees. Newsweek and other media outlets reported the news, citing a JPMorgan letter to consumers. JPMorgan did not provide comment by deadline.

Chase allows its credit card customers to split specific payments on their card statements into three, six or 12 monthly installments from within its own app, for a fee.

BNPL loans — whether obtained through third-party apps, fintechs or challenger banks — became popular in the U.S. during the pandemic, and have since proliferated into higher-risk options that are costly to consumers. Banks and large technology companies that offer payments have moved into the BNPL market, creating a need for JPMorgan and potentially other banks to protect their own installment programs.

Since JPMorgan has a card-linked BNPL service, the bank's move is a strategic play to bring awareness to its own product, said Ben Danner, a senior analyst at Javelin Strategy & Research.

"And using credit cards to pay for BNPL has already encountered resistance in the past," Danner said, noting that Capital One, for example, does not allow its credit cards to be used for BNPL payments to third parties and American Express does not allow credit card payments in some circumstances, such as a user creating a one-time Klarna card for a BNPL loan.

"A large segment of consumers are already accustomed to not using a credit card for BNPL payments," Danner said.

Payments

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Concerns over consumers using BNPL apps to quickly accumulate debt they can't pay will likely lead to new regulation. The Consumer Financial Protection Bureau plans to classify BNPL loans as credit cards, requiring the loans to follow the same rules as credit cards. That would place BNPL under the Truth in Lending Act, a 56-year-old law that requires lenders to disclose lending terms, and enable consumers the right to dispute charges and receive refund credits to their balances. There could also be tighter consumer protection rules for BNPL lending as part of the CFPB's action.

"You can't pay for a credit card with a credit card," said Richard Crone, a payments consultant, noting that it's extremely rare for any card issuer to allow another credit card to be used to fund monthly credit card bills.

But since BNPL for now is a different form of credit, there are ways that consumers can "game" the system by using a credit card as a form of payment for BNPL loans. BNPL providers that accept credit cards for post-purchase BNPL payments are enabling a version of a balance transfer in which consumers are in effect moving one form of recurring debt to another. Banks can benefit from this form of transfer through extra interchange revenue for the payments and increasing the outstanding balance for the bank card, Crone said, adding that it can also be dangerous.

"When someone pays a BNPL loan with a credit card, they are expanding their credit line one bill at a time," Crone said. "So theoretically that increases the credit risk for that card account."

Some consumers also prefer to use credit cards for as many payments as possible, and pay their credit card bill in full each month, Crone said, calling that group "points mongers."

"Some people will go through all kinds of contortions just to get points," Crone said, noting that JPMorgan has a large portfolio of point-accumulating credit cards. It could be in Chase's interest to have more control over how its cards are being used to earn rewards.

Citizens Bank, Synchrony, Bread Financial, U.S. Bank and Citigroup have all launched their own BNPL products in recent years, creating more competitive pressure among banks and a need to consider third-party compliance challenges.

"With the growing regulatory scrutiny from the CFPB, I could see more issuers enacting [JPMorgan's] policy, especially ones that offer their own card-linked BNPL services," Danner said.

For the third-party BNPL vendors, this might sting, but there is still a future for these apps, Danner said.

For example, a lot of consumers like to use BNPL from third parties and enjoy the zero interest financing option, while a user often has to pay a monthly fixed fee with card-linked plans, according to Danner, adding that several third-party BNPL companies are pushing customers toward using their own payment products such as the Klarna Card or Affirm Card.

"What we will see in the future is this continued coexistence of BNPL providers and card-linked BNPL plans from the issuers," Danner said

The main threat to BNPL apps could be the borrowers' inability to pay. BNPL users are more likely to use high-interest financing options like payday loans to cover their bills, according to the CFPB. And more than half of financially fragile consumers, or those with credit scores below 620, are using BNPL to cover household expenses, according to the Federal Reserve Bank of New York.

"If a BNPL customer can't use another payment method other than a credit card to pay down a BNPL loan, they are a poor credit risk," said Bob Meara, principal analyst for banking at Celent. "That's the real threat to BNPL providers."