By Ray Birch
LOMBARD, Ill.—Buy now, pay later (BNPL) is a larger threat to credit card business than many had originally forecast, asserts one analyst, who believes the popular borrowing option is also a Trojan horse that will steal away younger members. But there may also be one “good opportunity” for CUs.
“Buy now, pay later services are really going to have an impact on the lending space,” said Bill Handel, SVP of research at Raddon. “Especially in the credit card space.”
Handel said the primary interest today is from strong users of credit cards who carry balances.
“They will begin to look for this type of option as a way of reducing the cost of acquisition of goods,” explained Handel. “What BNPL is doing is shifting a lot of that potential credit card activity over to a different sphere. That's really a major challenge for credit unions in 2022 that we think will be out there.”
Handel emphasized the rapid growth of BNPL will only continue this year.
“But I do think there will eventually be some regulatory oversight on this product. The CFPB has talked about this as something they’re looking at because, to a certain extent, they look at this the same way they might look at NSF activity or payday lending—probably more akin to payday lending. Then, they will try to make sure there's no consumer abuses that are happening.”
‘A Major Threat’
Credit unions must pay close attention to the new offerings, insisted Handel.
“There are emerging players, like Affirm, Klarna…,” Handel noted.
Handel said credit cards, particularly at the big banks, long been a Trojan horse inside of which are hidden strategies for grabbing consumers and members from other financial institutions.
“You get them your credit card, they like your card service, and then you cross-sell your other offerings,” said Handel.
Today, that new Trojan horse is BNPL, said Handel, adding the product has significant appeal to younger consumers.
Bill Handel
“We've done some recent research that shows a very high percentage of people are very interested in using BNPL. And typically it’s the younger individuals who are very interested,” he said. “I really think BNPL is becoming a major threat to credit unions and their younger members. That's what the big banks have been doing in credit cards, and now they are turning to buy now, pay later. It’s their Trojan horse.”
The BNPL Evolution
Handel said it is very interesting how BNPL is evolving.
“What you're doing with buy now, pay later, to a certain extent, is you are usurping the role of a credit card,” Handel explained. “It becomes an entre point. I think it's a very significant long-term issue that we have to pay attention to. It’s a very different way of lending, because what it essentially does is take the unsecured lending and transforms it in a very significant way. It is a much more evergreen type of lending opportunity. If the credit union industry could find a way to make buy now, pay later work for the movement…”
In earlier interviews with CUToday.info, analysts have stated credit unions face a hurdle with offering buy now, pay later, due to membership requirements, which slows down the application process and make it less attractive than the fast-and-simple processes for bank and fintech BNPL offerings at point-of-sale.
‘Just Haven’t Figured Out How’
“If credit unions get this going, they could help members take pieces of their credit card debt and restructure it,” Handel continued. “Take $2,000 of debt and turn it into four payments of $500. You could say to members, ‘We have the rails in place to help you do that.’ If you you're not carrying that debt for long periods of time, you can be much better about managing your money and managing your interest expenses. It's a good opportunity, but we just haven't figured out how we work it yet.”
Handel noted that BNPL has led to some interesting developments in other countries where the service has been in place for years. He noted that BNPL has markedly affected credit cards in Australia, leading to some 0% cards to compete. He pointed out, however, that in Australia they allow for fees on card purchases, which in somewhat takes the place of interest charges.
Handel emphasized, again, the threat BNPL presents to credit unions in 2022 and beyond.
“It's a way for somebody to attract a household and then potentially begin to cross-sell,” he said. “And it’s very appealing to a younger demographic.”