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Will buy-now-pay-later installments transform how consumers use credit cards?
Big techs entering the credit space
Recently, PayPal announced an interest free ‘Pay in 3’ service for UK customers, a service already available to its US customers. Now, alongside their highly promoted offering to pay with credit, we can also expect a push to pay in installments. PayPal and Amazon have already forged forward into the credit market, with a PayPal Credit or Amazon card promo offer at the point of sale. Off the back of their “heritage as a responsible lender through PayPal Credit”, they are now taking up Klarna’s challenge in the buy-now, pay-later space. Will these developments ultimately lead to a change in how consumers use credit cards for lower ticket items?
Buy-now-pay-later, a substitute for credit cards?
Credit cards today can be used for the same purposes that unsecured lending was used 15 years ago, with large balance transfer offers, higher credit limits, and 0% purchase offers. It follows that fintechs now offer unsecured lending loan amounts which were only possible with secured loans 15 years ago (and at a much faster speed). It is therefore unsurprising that something else has come along as a substitute for credit cards when making lower-value purchases.
Fintechs like Afterpay offer customers an alternative to debit and credit card payments — spreading the burden of an up-front payment into interest-free installments. Some may argue that this is simply the emperor’s new clothes. Installment payments are hardly new, being offered in late night telesales, furniture and layaway payments. European issuers often use credit cards as charge cards, facilitating installment plans with preferred merchants.
The advantage of big tech insight
This time, however, it’s big tech which is behind installment payments. Amazon probably knows more about me than my own bank. It knows what I like to buy and when. Hence, it probably knows when it’s a timely moment to present its installment offer – for that branded blender that I just ‘really need right now’. Furthermore, Amazon entices me to upgrade from the low-spec monitor to high-spec one that will help me working from home; and now I can afford it too, with only four, equal, interest-free, monthly payments.
Fintechs at the point of purchase, digitally and in-store
This brings us to PayPal, Clearpay, Klarna, Swiftpay, and all the other buy-now, pay-later lenders. As e-commerce volumes continue to skyrocket during the pandemic, these lenders could not be better placed – right at the online checkout. We may never return to the halcyon days where you walked up to the register to pay, where cashiers promoted store cards through discounts and cashbacks to get you to complete the application form. Now, with a few taps on your own screen, online shopping is instantaneous, with digital lending options right at the checkout .
With near instant sign-up, verification, and integration - where is the incentive to head to the store? Even when you do, lenders like Affirm are right there to bridge the gap between in-store and online. In addition, Affirm can instantly increase your line of credit when you spend more. You no longer have to wait for your bank’s approval for a new credit limit, Affirm does it proactively in your app!
Affirm: Providing instant eligibility and a virtual card for purchases
How can traditional issuers and lenders compete?
Should traditional lenders provide more contextual mobile offers? Should they launch virtual cards for use with partner merchants? Or should they partner with or buy cutting-edge fintechs? Open Banking and PSD2 have offered many issuers the opportunity to encourage customers into their banking apps for anything and everything. Fintechs have moved quickly, but banks are finally waking up to ensure their longer-term survival. Just this month in Australia, Afterpay became the first fintech to join Westpac’s banking-as-a-service platform.
Whilst regulatory buzz is emerging about buy-now pay-later, it is currently primed to create habit-forming behaviours with consumers. Once these habits are adopted, issuers may have missed their opportunity to better insert themselves into the path to purchase. Consumers now have a wider consideration set which could hinder the return to credit cards for that short-term lending and revolving behaviour which bank balance sheets rely on.
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