The recently released State of Loyalty: 2022 Credit Card Rewards Report from loyalty solutions firm iSeatz pinpoints trends that could animate credit card issuers in the coming months.
Of those listed - buy-now-pay-later (BNPL) plans, digital wallets, paying with points and cryptocurrency rewards - BNPL, a type of reverse “layaway” approach, could be the next big thing for credit card issuers.
BNPL is a money-lending program that enables consumers to receive a product or service and pay for it in several installments (typically with a small fee added instead of interest). For many consumers, it’s better than the traditional layaway approach, which defers receipt of the product or service until the customer pays the entire balance.
Third-party FinTech firms lead the BNPL movement. And it’s becoming a crowded space where companies, including PayPal Credit, Afterpay, Affirm, Klarna, Zip Pay, Quadpay, Uplift, Perpay, Sezzle, Zebit, and Splitit, aggressively compete.
FinTechs partner with retailers to offer the plans to consumers at the point of sale online through the participating retailer’s ecommerce website or, in several cases, offline via the BNPL company’s app. The app creates a digital card that customers can add to their digital wallet (Apple Pay, Google Pay, or Samsung Pay, for example) for tap-to-pay convenience.
Retailers have offered postponed payments since the mid-1800s, but BNPL plans, such as the ones trending today, likely took off in the 1980s and 90s when department stores began issuing private-label credit cards. Around 2012, the first FinTech startup, Affirm, christened the latest iteration of installment plan financing. Afterpay, Klarna, and Sezzle followed within a few years.
Benefits of buy-now-pay-later
Consumers flock to BNPL because it's a faster, more transparent, and convenient way to access credit. It helps consumers lock in low prices for big-ticket items like travel and addresses their growing desire for more flexible spending options.
Plus, when consumers make BNPL purchases using a credit card that is part of a rewards program, they can earn miles, points, or cashback in addition to deferring payments that can remain interest-free if they pay off their credit card every month.
Most BNPL companies earn financing fees (ranging from 2% to 8%) from the merchant. However, they may also charge fees to consumers on larger purchases (travel included) depending on the buyer’s credit score and other factors. They also typically earn revenue and late fees charged to consumers who fail to comply with repayment terms.
And despite the high cost of participation in BNPL programs, merchants are buying into the BNPL trend because, as BNPL firm Afterpay explains, it drives incremental sales, increases average order value, and attracts new customers.
The State of Loyalty research bears some of that data out. A BNPL option at checkout increases conversion rates twenty to 30% and lifts average ticket sales 30% to 50%, the report says.
The buy-now-pay-later opportunity for credit card issuers
BNPL is snowballing in popularity. Analysts expect such short-term, point-of-sale financing to grow 181% by 2024, and the Federal Reserve Bank of Kansas City, citing data from Accenture, says, "the number of BNPL users in the United States has grown by more than 300% per year since 2018, reaching forty-five million active users in 2021.
Amex Trendex data shows that Millennials, a highly sought-after customer segment for credit card issuers, are mainly behind the trend. 54% are interested in using a BNPL plan for travel and 62% are interested in a buy-now-pay-later offering that comes with their credit card.
Because the interest in BNPL is so strong, it’s a natural progression for credit card issuers to offer BNPL plans that mirror (and improve upon) the programs that BNPL FinTechs offer. BNPL programs are still loans, and credit card issuers have been in the loan business for many more years than the FinTechs.
“We launched Plan It, our on-card buy now, pay later feature, in 2017 to give Card Members more flexible ways to pay for large purchases. Since then, its popularity has grown and we’ve evolved the tool to make it even easier to use. For example, in the past year we’ve added Plan It as a checkout option on AmexTravel.com and delta.com. When it comes to bigger purchases like travel, consumers are looking to make financing decisions as they book, and having Plan It right at checkout makes that possible,” said Anthony Cirri, executive vice president, head of global consumer lending and cobrand at American Express.
Credit card issuers have a lot to gain by integrating BNPL into their rewards programs. It’s a way to further engage the reported 43% of 18- to 31-year-olds who have at least one rewards credit card (and are the likeliest age group to choose BNPL instead of a credit card for travel) and potentially entice more of the remaining 57% to join a rewards program.
Credit card issuers could renegotiate their fee structure with retailers by replacing the third-party BNPL firm in the purchase financing food chain. They can offer merchants the benefits of immediate payment and the incremental sales, increased order size, and new customer bonanza that comes with BNPL programs.
The competitive heat is on
Increased competition may also be a compelling argument for credit card issuers to invest in BNPL. Technology firms are starting to encroach on banks’ (the primary issuers of credit cards) more lucrative lines of business.
“As more customers choose Fintechs for simplicity, efficiency, and lower costs, many tech companies are expanding banking-type services to include payments, savings, and investments,” RBC Capital Markets reports.
Rewards programs had been a way for credit card issuers to differentiate from BNPL lenders. However, a growing number of BNPL FinTechs have added rewards programs. BNPL firm Klarna, for example, launched a rewards program in 2020 called Vibe. When consumers pay for online purchases using Klarna, they earn points, which they can redeem for rewards like gift cards from Klarna partners. Sound familiar?
Digital wallets are a pathway for credit card issuers to participate in the mobile payments trend. However, Apple is working on a program that allows its Apple Pay digital wallet users to pay for any purchase in installments over time.
The new program, Apple Pay Later, would likely use the consumer’s existing line of credit, typically a credit card, to fund the installments. Doing so effectively converts what could have become a revolving loan (the type that credit card issuers provide) into a BNPL loan.
How issuers are getting a piece of the BNPL pie
With market share threatened, credit card issuers have been eager to develop their BNPL offerings. American Express, Chase, and Citibank have launched and expanded BNPL programs in which cardholders can divide larger purchases into payments for a fixed monthly fee and no interest charges. Other major banks and payment networks have announced they are also exploring proprietary BNPL programs.
Credit card issuers can also overcome the seeming advantage FinTech firms have over banks—integration with their retailers’ ecommerce sites, which enables a BNPL option at checkout.
Banks already have an in-house option offering the same functionality. Credit card issuers can leverage their loyalty technology partners to provide a BNPL payment option at checkout on the issuer’s travel booking platform, where it’s easier for consumers to access and participation is higher.
Plus, Offering BNPL via the travel platform, where the issuer is both the merchant and financier, means increased bookings and booking values benefit issuers on both ends of the transaction. So far, American Express leads the pack here, with their “Pay It, Plan It” program integrated at checkout for flights and hotels on AmexTravel.
Keeping the BNPL transaction and account servicing in-house in a travel rewards program also protects the issuer's brand. BNPL companies are at their best at the point of sale, but some lose interest when flights are canceled or delayed incurring extra charges.
Although credit card issuers typically perform a more thorough check of creditworthiness on potential credit card program members, they may consider a soft check (as some BNPL companies do) in exchange for a sort of provisional membership.
Once the consumer has demonstrated the appropriate behavior by paying off the short-term loan, issuers could offer the more traditional revolving line of credit, which comes with access to the issuer's rewards program and other benefits.
Bringing BNPL into the fold
Buy-now-pay-later financing is a payment juggernaut that’s well within the credit card issuer’s wheelhouse.
It can be seamlessly implemented in travel rewards programs through the issuer’s travel booking platform and has the potential to be replicated across other spend categories besides travel.
BNPL has all the attributes of a burgeoning new business model - high consumer demand, exploding growth, immediate revenue potential, and low cost of implementation (credit card issuers already have the administrative infrastructure in place).
It could also be one trend that credit cards issuers can’t afford to ignore.
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